P13-7 Breakeven analysis Molly Jasper and her sister, Caitlin Peters, got into t
ID: 2658822 • Letter: P
Question
P13-7 Breakeven analysis Molly Jasper and her sister, Caitlin Peters, got into the novelties business almost by accident. Molly, a talented sculptor, often made little figurines as gifts for friends. Occasionally, she and Caitlin would set up a booth ance, Fourteenth Edition, by Lawrence J. Gitman and Chad J. Zutter. Published by Prentice Hall. Copyright© 2015 by Pearson Education. RT 6 Long-Term Financial Decisions at a crafts fair and sell a few of Little by little, demand for the figurines, now called Mollycaits, grew, and the sisters began to reproduce some of the favorites in resin, using molds of the originals. The day came when a buyer for a major department store offered them a contract to produce 1,500 figurines of various designs for $10,000. Molly and Caitlin realized that it was time to get down to business. To make bookkeeping simpler, Molly had priced all the figurines at $8.00 each. Variable operating costs amounted to an average of $6.00 per unit. To produce the order, Molly and Caitlin would have to rent industrial facilities for a month, which would cost them $4,000.Explanation / Answer
Contribution margin per unit = price per unit - variable operating cost per unit = 8-6 = $2 per unit
fixed costs = 4,000 (rent)
Thus break even = fixed costs/contribution margin per unit
= 4,000/2
= 2,000 units per year. This is the operating breakeven point for Mollycait's.
e. As actual costs vary from unit to unit one of the alternatives can be to price the units differently on the basis of actual variable costs associated with the units. The units that have a higher cost of production should have higher prices and units having lower cost of production should have lower prices.
If the company wants to sell all units at the same price then they will probably have to reduce the offering of 15 different varities that currently on sale to a smaller number. The smaller number of varities should include only those models or varieties that have a variable operating cost of $6 or less than $6.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.