Schweser Satellites Inc. produces satellite earth stations that sell for $100,00

Question

Schweser Satellites Inc. produces satellite earth stations that sell for $100,000 each. The firm’s fixed costs, F, are $2 million, 50 earth stations are produced and sold each year, profits total $500,000, and the firm’s assets (all equity financed) are $5 million. The firm estimates that it can change its production process, adding $4 million to investment and $500,000 to fixed operating costs. This change will (1) reduce variable costs per unit by $10,000 and (2) increase output by 20 units, but (3) the sales price on all units will have to be lowered to $95,000 to permit sales of the additional output. The firm has tax loss carryforwards that render its tax rate zero, its cost of equity is 16%, and it uses no debt.

4. Would the firm’s break-even point increase or decrease if it made the change?

Explanation / Answer

Calculation of break even point before changes:

Break even point ($) = Total Fixed Cost / Contribution margin %

Total Fixed cost =$2,000,000

Contribution per unit = ( Profit + Fixed Costs) / units

= (500,000+2,000,000) / 50 = $50000

Contribution margin % = Contribution per unit / Sales Price

= 50000 / 100,000

= 50%

Hence Breakeven point before changes = 2000000 / 50% = $4,000,000

Calculation of break even point after changes:

Break even point ($) = Total Fixed Cost / Contribution margin %

Total Fixed cost =$2,000,000+500000 = $2,500,000

Contribution margin % = Contribution per unit / Sales Price

= (50000-10000) / 95000

= 0.4211

= 42.11%

Hence Breakeven point after changes = 2,500,000 / 42.11% = $5,936,832

Hence breakven point shall increase.

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.