a) An entrepreneur wants to mass market and produce a product of his/her own des

Question

a) An entrepreneur wants to mass market and produce a product of his/her own design. The amount of starting capital needed for a factory and necessary equipment is calculated at $32,000. Costs of materials and labor are estimated at $25.00 per unit. Market research has shown that the product would sell for approximately $65.00 each. How many units will need to sell for the entrepreneur to break even?

b) The entrepreneur is unsure that sales for his/her product will be above the breakeven point calculated above. If the entrepreneur does the work manually and chooses a least costly factory site, the starting capital needed would change to $12,600, but the cost per unit will rise to $30.00. How many units will need to sell for the entrepreneur to break even given this new scenario?

c) Between the two processes, for what level of forecasted demand in units (anticipated volume of output) should the new scenario be chosen?

Explanation / Answer

a. Break even units = total fixed costs/(revenue per unit - variable cost per unit)

= 32,000/(65-25)

= 32,000/40

= 800 units.

b. In the new condition, the fixed costs and the variable costs per unit have changed. Break even for the new scenario =  total fixed costs/(revenue per unit - variable cost per unit) = 12,600/(65-30) = 12,600/35 = 360 units.

c. The new scenario should be selected when volumes is greater than 360 units, as profits will be generated after 360 units (break even point).

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