Sally Marly has come to you for some help in starting her new high-end kite comp

Question

Sally Marly has come to you for some help in starting her new high-end kite company. She has provided you with the following information: Sally thinks she can sell these kites for $75, and wants to know how many she must sell annually to breakeven. She is also concerned about her pricing. These are very high-end kites and could sell for more than the planned price of $75. however, Sally is also concerned about the limited market for such high-end kites. Consequently she wants you to determine the breakeven quantity if she raises the price to $90 each. With this information, and her feel for the market, Sally can decide what annual volume she will plan for.

Explanation / Answer

Breakeven when the selling price is $75: Fixed cost/(Price per unit - variable cost per unit).

Fixed costs = design software+graphic designer fee+promotional materials = 12,000+10,000+3,500 = 25,500

Price per unit = $75. Variable costs per kite: (i) string = 15*0.2 = $3 (ii) fabric = 4*1.5 = $6 (iii) dowel = 20.5*0.35 = $7.175 (iv) handle = $4 (v) labor = 1.5*20 = $30. Total variable costs = 3+6+7.175+4+30 = $50.175

breakeven (using the formula given at the top): 25,500/(75-50.175) = 1027.19 kites or 1,027 kites (rounded off)

If the price is raised to $90, then the breakeven volume will be: 25,500/(90-50.175) = 640 kites

Let the number of kites sold at $75 be "x". In order to make a profit of $6,000: price per kite*number of kites - fixed costs - variable cost per kite*number of kites = 6,000

75x - (25,500) - (50.175x) = 6,000. or 24.825x = 31,500. or x = 1,269 kites.

if the price is $90: 90x - 25,500 - 50.175x = 6,000. or 39.825x = 31,500. or x = 791 kites.

New fixed cost if celebrity is used: old fixed cost+cost of celebrity = 25,500+21,000 = 36,500

breakeven: 36500/(75-50.175) = 1,470 kites

Profit of $6,000: 75x - 36500 - 50.175x = 6,000. or 24.825x = 42500 or x = 1712 kites.

Breakeven when the new fabric is used: new variable cost of fabric = 4*4 = 16. new total variable cost = old variable cost - old cost of fabric+new cost of fabric = 50.175-6+16 = 60.175

Breakeven = 25,500/(75-60.175) = 1,720 kites.

Profit of $6,000: 75x - 25,500 - 60.175x = 6,000. or 14.825x = 31,500. or x = 2,125 kites.

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.