ASSIGNMENT UNIT 4 1

Assignment Unit 4

University of the People

BUS 3301

8 July 2022
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Assignment Unit 4Greg Morrison recently graduated from construction engineering school. He is

considering opening his own construction business providing module housing. Providing module

homes is a high-fixed cost business, as it requires considerable expenditures for facilities, labor,

and equipment, no matter how many families are served. Assume the annual fixed cost of

operations is $800,000. Further assume that the only significant variable cost relates to the

module homes, themselves. An average module home costs $12,000. Greg's banker has asked a

variety of questions in contemplation of providing a loan for this business:

(a) If the average family is charged $18,000 for installation of a module home, how many

families must be served to clear the break-even point?

(b) If the banker believes Greg will only serve 100 families during the first year in business, how

much will the business lose during its first year of operation?

(c) If Greg believes his profits will be at least $100,000 during the first year, how much is he

anticipating for total revenue?

(d) The banker has suggested that Greg can reduce his fixed costs by $150,000 if he will not buy

any vehicles. Greg can instead rent vehicles as needed. The variable cost of renting is $700 per

family served. Will this suggestion help Greg reach the break-even point sooner?

(a) If the average family is charged $18,000 for the installation of a module home, how many

families must be served to clear the break-even point?

ASSIGNMENT UNIT 4 3

Fixed Cost = $800,000.00

Variable Cost = $12,000.00

Price = $18,000.

Break even = Fixed cost / Contribution Margin

Contribution Margin per Unit = Price - Variable Cost

Contribution Margin per unit = $ 18000 -$ 12000

Contribution Margin = $ 6000 dollars.

Now, break even = 800 000 / 6000

Break even = 133.33 =134 families

(b) If the banker believes Greg will only serve 100 families during the first year in business, how

much will the business lose during its first year of operation?The loss would be $800,000 -

($6000 x 100 families) = $800,000 - $600,000 = $200,000.

ASSIGNMENT UNIT 4 4

Fixed Cost = $800,000.00

Variable Cost = $12,000.00

Price = $18,000.00

Home Served = 100

Revenue = Home Served x PriceRevenue = 100 x $18,000.00

Revenue = $1,800,000.00

Total Variable Cost = Home Served x Variable Cost Per Unit

Total Variable Cost = 100 x $12,000.00Total Variable Cost = $1,200,000.00

Revenue.........$1,800,000.00

Less:

Total Variable Cost.......($1,200,000.00)

Fixed Cost...........................($800,000.00)
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Net Loss................($200,000.00)

(c) If Greg believes his profits will be at least $100,000 during the first year, how much is he

anticipating for total revenue?

First you have to compute the required sales in units

Required Sales in Units = (Fixed Cost + Required Profit)/Contribution Margin per Unit

Required Sales in Units = ($800,000.00 + $100,000.00)/$6,000.00Required Sales in Units = 150

Required Revenue = Required Sales in Units x PriceRequired Revenue = 150 in Units x

$18,000.00Required Revenue = $2,700,000.0

(d) The banker has suggested that Greg can reduce his fixed costs by $150,000 if he will not buy

any vehicles. Greg can instead rent vehicles as needed. The variable cost of renting is $700 per

family served. Will this suggestion help Greg reach the break-even point sooner?

Fixed Cost new ($800,000-$150,000) = $650,000.00Variable

Cost new ($12,000+$700) = $12,700.00Price = $18,000.00

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First you have to compute the new contribution margin per unit

New Contribution Margin per Unit = Price - Variable Cost newNew Contribution Margin per

Unit = $18,000.00 - $12,700.00

New Contribution Margin per Unit = $5,300.00

New Break-even Point = Fixed Cost New / New Contribution Margin per Unit

Break-even Point = $650,000.00/$5,300.00Break-even Point = 122.64

References

Principles of Accounting, Chapter 18: Cost-Volume-Profit and Business Scalability:

http://www.principlesofaccounting.com/chapter-18/