Problem 1:

To manufacture a widget component requires an overhead (fixed) cost of $4000 and a variable unit cost of $5.50 per unit. What is the total cost and the average cost of producing a lot of 1500 widgets? If the selling price is $16 per unit, what is the break-even point? Explain what the break-even results means in terms of evaluating profit or loss.

Problem 2:

A manufacturing company is negotiating with a potential supplier for the purchase of 150,000 components. The manufacturer uses reverse pricing analysis to estimate the suppliers variable costs are $7.00 per unit and that fixed costs, depreciation, overhead, etc., are $55,000. The supplier quotes a selling price at $12 per unit. Calculate the estimated average cost per unit. Do you think the supplier is asking too much for their parts? Could the purchasing department negotiate a better price? Explain your answer.