Question

Therapeutic Systems sells its products for \(13 per unit. It has the following costs:

Rent	\)145,000
Factory labor	\(4.00 per unit
Executives under contract	\)186,500
Raw material	\(1.20 per unit

Separate the expenses between fixed and variable costs per unit. Using this information and the sales price per unit of \)13, compute the break-even point.

Short answer

Rental expenses and the executives under contract expenses are considered as the fixed cost and the factory labor cost and the raw material expenses are considered as the variable cost.

The break-even point of the company is 42,500 units.

Step-by-step solution

Bifurcation of different cost as fixed cost and variable cost

Rent	Fixed cost
Factory labor	Variable cost
Executives under contract	Fixed cost
Raw material	Variable cost

Break-even point

$\begin{array}{rcl}\mathrm{Break}\mathrm{even}\mathrm{point}& =& \frac{\mathrm{Fixed}\mathrm{cost}}{\left(\mathrm{Revenue}\mathrm{per}\mathrm{unit}-\mathrm{Variable}\mathrm{cost}\mathrm{per}\mathrm{unit}\right)}\\ & =& \frac{\left(\$145,000+\$186,500\right)}{\left(\$13-\left(\$4+\$1.20\right)\right)}\\ & =& \frac{\$331,500}{\$7.80}\\ & =& 42,500\mathrm{units}\end{array}$