The Weaver Watch Company sells watches for $25; the fixed costsare $140,000; and

Question

The Weaver Watch Company sells watches for $25; the fixed costsare $140,000; and variable costs are $15 per watch.

a.     What is the firm’s gain or loss atsales 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 thebreakeven point if the selling price were raised to $31? What isthe significance of this analysis?

d.     What would happen to the breakevenpoint if the selling price were raised to $31 but variable costsrose to $23 a unit?

Explanation / Answer

a. Gain or loss at 8,000 watches Sales    200,000 -vc       120,000 -fc        140,000 Loss     (60,000) Gain or loss at 18,000 watches Sales      450,000 -vc         270,000 -fc         140,000 Profit       40,000 b.Breakeven point Fixed cost Contribution margin 140,000 25-15 =14,000 units c.selling price raised to 31 140,000 31-15 =8,750 units. The significance of increasing the price to $31 is the businesswill start making profit from 8,751th unit instead of waiting till14,001th unit when the price was $ 25 only. d.BEP when selling price is 31 and variable cost is 23. 140,000 31-23 =17,500 units.

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