Juan Alavanca is evaluating the risk of two companies in the machinery industry: The Gearing Company and Hebelkraft, Inc. Alavanca used the latest fiscal year’s financial statements and interviews with managers of the respective companies to gather the following information:
The Gearing Company | Hebelkraft, Inc. | |
Number of units produced and sold | 1 million | 1.5 million |
Sales price per unit | $200 | $200 |
Variable cost per unit | $120 | $100 |
Fixed operating cost | $40 million | $90 million |
Fixed financing expense | $20 million | $20 million |
Q. Based on this information, the breakeven points for The Gearing Company and Hebelkraft, Inc. are:
A.0.75 million and 1.1 million units, respectively.
Breakeven point is (Fixed op+fixed financing exp)/contribution per unit
For gearing company:
Breakeven= (40+20)/(200-120)=0.75 mn units.
For Hebelkraft:
Breakeven= (90+20)/(200-100)= 1.1 mn units.
Hence option A is the answer