Sam Snead is in the process of deciding whether or not to manufacture violins in

Question

Sam Snead is in the process of deciding whether or not to manufacture violins in his garage and sell them to area students who want to take violin lessons and join the Pembroke High School orchestra. He knows there are at least 25 students who would be willing to purchase his violins at a selling price of $350 each. Sam says his total fixed cost for necessary shop equipment (saws, clamps, kiln drier) is $ 2,800. Sam expects that total labor and materials for each instrument will be $125. Question: Assuming Sam does make and sell 25 violins for $350 each, does he break-even? You must show all work a) Does he break even? Circle one: YES or NO IF YOU SAID YES, how much (if any) pre-tax profit will Sam make? IF YOUR SAID NO, how much of a financial loss will Sam sustain?

Explanation / Answer

We need to understand break evn analysis here.

By definition: - The break even point is the production level where total revenues equals total expenses."

Therefore if you sell more than the break even qty you make a profit otherwise you suffer a loss.

Contribution margin is SP-VC (selling price -variable cost)

Break even Qty is given as: Total Fixed cost/ contibution margin

Given Fixed cost is $2800

Also, SP is $350 per voilin and Variable cost is $125 per voilin

Thus Sams'contribution margin is $350-$125 = $225

The break even Qty is therefore $2800/$225 roughly 13 units.

Assuming Sam sells 25 units he will make profit as the sales will be more than the Breakeven qty.

How much profut does Sam make:-

Assumption he sells 25 units his Total cost will be: Variable cost+Fixed cost = (125*25)+2800 =3125+2800=$5925

His sales revenue will be: = 25*350= $8750

Sam's pre-tax profits can be given as (Sales Revenue-Total Cost) = 8750-5925= $2825 (ans).

Thanks!

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