Last year, a manufacturer introduced a new product that was a huge success. The
ID: 1095705 • Letter: L
Question
Last year, a manufacturer introduced a new product that was a huge success. The company invested $2.8 million for a plastic injection molding machine (which can be sold for $2.0 million) and $150,000 in plastic injection molds specifically for the product (not valuable to anyone else). Labor and the cost of materials necessary to make each product is about $2. This year, a competitor has developed a similar product that has significantly reduced demand for the product. Now, the original manufacturer is deciding whether they should continue production.
If the estimated demand is 120,000 units, what is the breakeven price? Should the manufacture shut down?
Explanation / Answer
The break-even price is 26 when the cost price is 2 , that means the manufacturer has to operate at the contribution margin of 24 . But with inceased competition , the selling price will fall and will come very close to the cost price in the long run and such high margin will not be available .But the selling price will also be dependent on the cost of production of the competitor. In the absence of the actual selling price in the market , it is not possible to say if the manufacturer should shut down or not and within what time frame.
Particular Amount plastic injection molding machine 2800000 plastic injection molds 150000 Total Cost 2950000 Cost of an unit 2 Let the break-even Price is P, when Qty=120000 120000*(P-2) 2950000 or 120000P-240000 2950000 or P=(2950000+240000)/120000 26.58 Recovery of money in case of Sale-off of machine 2000000 Loss from sales 800000Related Questions
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