The Weaver Watch Company sells watches for $25, the fixed costs are $140,000 and
ID: 2389573 • Letter: T
Question
The Weaver Watch Company sells watches for $25, the fixed costs are $140,000 and variable costs are $15 per watch.A. What is the firm's gain or loss at sales of 8,000 watches? at 18,000 watches.
B. What is the breakeven point? Illustrate by means of a chart.
C. What would happen to the breakeven point if the selling price was raised to $31? What is the significance of this analysis?
D. What would happen to the breakeven point if the selling price was raised to $31 but the variable costs rose to $23 a unit?
Explanation / Answer
The original profit formula can be written as: total profit= 25x, where x = number of watches sold. The original cost formula can be written as total cost = 140,000 + 15x.
Net profit/loss = total profit - total cost.
A. At 8000 watches... total profit = $200,000; total cost = $260,000; there is a net loss of $60,000. At 18,000 watches... total profit = $450,000; total cost = $410,000; there is a net profit of $40,000.
B. Breakeven point is when 14,000 watches have been sold, and there is no net gain or loss. Can be reached by graphing A = 25x; and B = 140,000 + 15x; and demonstrating where the two lines intersect (sorry no way to upload a picture).
C. If the selling price were raised to $31, the new breakeven point would exist when 8,750 watches have been sold. The significance of this analysis is that it demonstrates the correlation between a price change and the different amount of sales it would take to reach the breakeven point.
D. The breakeven point would be reached after selling 17,500 watches. Thus, increasing the variable cost by a higher scalar than you increased the price, will correspondingly also increase the breakeven point.
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