Tex-House builds and sells houses for $200,000 each. The firms fixed costs are $
ID: 2666038 • Letter: T
Question
Tex-House builds and sells houses for $200,000 each. The firms fixed costs are $3,000,000. 50 houses are built and sold each year. Profits total about $2,000,000. The firm estimates that it can change its production process by adding 4,000,000 to investment and $1,000,000 to fixed costs. This would reduce variable costs by $30,000 and increase output by 30 units. To permit sales of the new output, prices would have to be lowered by $20,000 per unit.Should the firm make the change?
At the new production level, what price would make profits equal zero?
Will the new production situation expose the firm to more or less risk?
Explanation / Answer
current
assumptions
income statement
per house revenue
200,000
Revenue
10,000,000.00
houses sold
50
fixed costs
3,000,000.00
variable costs per unit
100,000
variable costs
5,000,000.00
fixed costs
3,000,000
net income
2,000,000.00
Proposed
assumptions
income statement
per house revenue
180,000
Revenue
14,400,000.00
houses sold
80
fixed costs
4,000,000.00
variable costs per unit
70,000
variable costs
5,600,000.00
fixed costs
4,000,000
net income
4,800,000.00
1) should they make the investment- investment of $4m to get an incremental increase in Net Income per year of $2.8m. Don't know, it depends on the company's required pay back period.
2) $120,000
3) higher fixed costs means higher risk.
current
assumptions
income statement
per house revenue
200,000
Revenue
10,000,000.00
houses sold
50
fixed costs
3,000,000.00
variable costs per unit
100,000
variable costs
5,000,000.00
fixed costs
3,000,000
net income
2,000,000.00
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