4. Break-even analysis Aa Aa To be profitable, a firm has recover its costs. The
ID: 2771378 • Letter: 4
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4. Break-even analysis Aa Aa To be profitable, a firm has recover its costs. These costs include both fxed and variable costs. One way that a firm eval uates at what stage it would recover the invested costs is to calculate how many units or how much in dollar sales is necessary for the firm to earn a profit. Consider this case: Defense Dynamics Co. is considering a project that will have foxed costs of $10,000,000. Its sale price will be $37.50 per unit, and it will have a variable cost per unit of $12.80 Therefore, Defense Dynamics Co. has to sell units to break even on this project (QBE) Defense Dynamics Co.'s marketing sales director doesn't think that the market for the firm's goods is big enough to sell enough units to make the company's target operating pltof $15,000,000. In fact, she belleves that the firm wbe able to sel only about 175,000 units. However, she also thinks the demand for Defense Dynamis Co.'s product is relatively inelastic, so the firm can increase the sale price. Assuming that the firm can sell 175,000 units, what price must it set to meet the CFO'S EBIT goal of $15,000,0007 O $163.44 O $179.01 O $194.58 O $155.66 What affects the firm's operating break-even point? Several factors affect a firm's operating break-even point. Based on the scenarios described in the folliowing table, indicate whether these factors would increase a firm's break-even increase a firm's break-even quantity, decrease the break-even quantity, or leadExplanation / Answer
Defense dynamics is considering the project that
Fixed cost $ 10,000,000
Sell price $ 37.50
Variable cost $ 12.80
The formula for Break even point is as follow
BEP in units = x = Sixed cost/ sell price-veriable cost
So x =10,000,000/37.50-12.80
=10,000,000/24.70
=404858.30
-=404858
Suppose Company wants Proofit $ 15,000,000 and expect to sell 1,75,000 units then price of the product will be
175000=10,000,000+15,000,000/x-12.80
175,000=25,000,000/x-12.80
175,000x-12.80*175,000=25,000,000
175000x-2240000=25000000
175000x=25000000+2240000
x=27240000/175000
=155.65
What affect company operating break even point
Only fixed cost incresse = increase BEp Quantity
Only variable cost decreses =decrease BEp Quantity
Only tax rate increase =No change
when other factor remaining constant higher operating levrage have higher risk
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