This problem is designed to illustrate how the relative proportions of fixed and variable costs affect a firm’s net income when the sales volume changes.
Two hypothetical firms, Hi-Tech and Lo-Tech, manufacture and sell the same product at the same price of $50. Hi-Tech is highly mechanized with monthly fixed costs of $4000 and unit variable costs of $10. Lo-Tech is labour-intensive and can readily lay off or take on more workers as production requirements warrant. Lo-Tech’s monthly fixed costs are $1000, and its unit variable costs are $40.
a. Calculate the break-even volume for both firms.
b. At each firm’s break-even point, calculate the percentage of the firm’s total costs that are fixed and the percentage that are variable.
c. For a 10% increase in sales above the break-even point, calculate the dollar increase in each firm’s net income. Explain the differing results.
d. For a 10% decrease in sales below the break-even point, calculate the dollar decrease in each firm’s net income. Explain the differing results.
e. What is each firm’s net income at sales of 150 units per month and each firm’s loss at sales of 50 units per month?