Break even point satellites Inc. produces satellite earth stations that sell for

Question

Break even point satellites Inc. produces satellite earth stations that sell for s95,ooo each. The frms fixed costs, F, are $2.5 million, 50 earth stations are produced and sold each year, profits total $400,ooo: and the firm's assets (all equity financed) are $4 million. The firm estimates that it can change its production process, adding $3 million to on all units will have to be lowered to $84,000 to permit sales of the additional output. The frm has tax loss carryforwards that render its tax rate zero, is cost of equity is 12%, and it uses no debt. a. What is the incremental profit? To get a rough idea of the project's profitability, what is the project's expected rate of return for the next year (defined as the incremental profit divided by the investment)? Round your answer to two decimal places, Should the firm make the investment? GSelect b. Would the firm's break-even point inaease or decrease if it made the change? c. Would the new situation expose the firm to more or less business risk than the old one? I. It is impossible to state unequivocally whether the new situation would have more or less business risk than the old one. IL The new situation would obviously have more business risk than the old one. III. The new situation would obviously have less business risk than the old one. indTap Ce... X 6 ng cengage.com/static/nblui/index.html?nbld 108226&nbNodeld; 27538767#!&paren;

Explanation / Answer

$772,000.00

Existing Revised Increment Sale Unit 50 72 22 Selling Price/Unit $95,000.00 $84,000.00 -$11,000.00 Sale Value $4,750,000.00 $6,048,000.00 $1,298,000.00 Varriable Cost $1,850,000.00 $2,016,000.00 $166,000.00 Contribution $2,900,000.00 $4,032,000.00 $1,132,000.00 Fixed Cost $2,500,000.00 $2,860,000.00 $360,000.00 Profit $400,000.00 $1,172,000.00 $772,000.00

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