Question 9 75 points Save Ans An engineering firm measures i

Question 9 7.5 points Save Ans An engineering firm measures its output in standard service hours (SSH) per unit, which is a function of the skill levels of its engineers (skill levels range from an engineering intern to an engineering scientist). The variable cost is $60 per SSH and the fixed cost is $2,000,000 per year. The firm charges $100 for each service per hour. Assume the maximum hours the firm operates (that is the output) is 170,000 per year. a) Compute the break-even point in SSH b) At what percentage does the break-even occur as compared to the maximum hours the firm operates? c) What is the percentage reduction in break-even point if the fixed cost can be reduced by 20%? d) Does the break-even point increase or decrease if the charges per service is increased by 10%? e) What is your recommendation? Should the firm reduce the fixed cost or increase the price? Attach File Browse My Computer Browse Content Collection

Solution

9.

A.

Breakeven point = fixed cost / (selling price per unit – variable cost per unit) = 2000000/(100-60)

Breakeven point = 50000 SSH

B.

% at which break even occurs = 50000/170000 = 29.41%

C.

Breakeven point (when fixed cost lowers by 20%) = 2000000*(1-20%)/(100-60)

Breakeven point (when fixed cost lowers by 20%) = 40000 SSH

% reduction in breakeven point = (40000-50000)/50000 = -20%

So, there is a reduction of 20% in breakeven.

D.

Breakeven point (when service charge increase by 10%) = 2000000/(100*1.1 - 60)

Breakeven point (when service charge increase by 10%) = 40000 SSH

So, breakeven point decreases if service charges are increased by 10%.

E.

Firm has a reduced break-even of 40000 SSH in both the cases of decrease in fixed cost by 20% or increase in service charge of 10%. So, firm can opt for any of the method.