8. A new company to produce state-of-the-art car stereo systems is being conside

Question

8. A new company to produce state-of-the-art car stereo systems is being considered by Jagger Enterprises. The sales price would be set at 1.5 times the variable cost per unit; the VC/unit is estimated to be $2.50. What sales volume would be required in order to break even, i.e., to have an EBIT of zero for the stereo business with the following assumptions of fixed costs? A) Fixed costs are estimated at $120,000 vs. fixed costs are estimated at $100,000. B) W hat do the above results suggest with regard to the operating leverage vs. business risk?

Explanation / Answer

VC/ Unit = 2.5 SP/ Unit = 1.5 x VC = 3.75 (A) Break even point = Fixed cost / Contribution per unit Contribution per unit = 3.75-2.5 = 1.25 Fixed cost = 120000 100000 Contribution/ unit = 1.25 1.25 BEP = 96000 80000 (B) As the fixed cost increases the more sales is required to cover the cost. The higher is the required sales the more risky it is for the entity to achive it. Please provide feedback……... thanks in advance……… :-)

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