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Problems
1. Gateway Appliance toasters sell for $20 per unit, and the variable cost to produce
them is $15. Gateway estimates that the fixed costs are $80,000.
a. Compute the break-even point in units.
b. Fill in the table below (in dollars) to illustrate the break-even point has been
achieved.
Sales............................... ____________
– Fixed costs................. ____________
– Total variable costs... ____________
Net profit (loss)............ ____________
1. Solution:
Gateway Appliance
Fixed costs
BE
a. Pr ice-variable cost per unit
$80,000 $80,000
16,000 units
$20 $15 $5
2. Solution:
The Hazardous Toys Company
$15,000
BE 30,000 units
a. $8.00 $7.50
Fixed costs
BE
Pr ice variable cost per unit
$100,000 $100,000
8,000 units
a. $28 $15.50 $12.50
Fixed costs
BE
Pr ice variable cost per unit
$75,000 $75,000
6,818 units
b. $28 $17 $11
4. Shawn Penn & Pencil Sets, Inc., has fixed costs of $80,000. Its product currently sells for
$5 per unit and has variable costs of $2.50 per unit. Mr. Bic, the head of manufacturing,
proposes to buy new equipment that will cost $400,000 and drive up fixed costs to
$120,000. Although the price will remain at $5 per unit, the increased automation will
reduce costs per unit to $2.00.
As a result of Bic’s suggestion, will the break-even point go up or down?
Compute the necessary numbers.
4. Solution:
Shawn Penn & Pencil Sets, Inc.
$80,000 $80,000
BE (before) 32,000 units
$5.00 $2.50 $2.50
$120,000 $120,000
BE (after) 40,000 units
$5.00 $2.00 $3.00
5-11. Solution:
Sterling Tire Company
20,000($60 $30)
20,000($60 $30) $400,000
20,000($30)
20,000($30) $40,000
$600,000 $600,000
3.00x
a. $600,000 $400,000 $200,000
5-11. (Continued)
EBIT $200,000
DFL
EBIT I $200,000 $50,000
$200,000
1.33x
b.
$150,000
Q (P VC)
DCL
Q(P VC) FC I
20,000($60 $30)
20,000($60 $30) $400,000 $50,000
$600,000 $600,000
4x
c. $600,000 $400,000 $50,000 $150,000
$400,000 $400,000
BE 13,333 units
d. $60 $30 $30