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Lucid Images Ltd manufactures premium high definition televisions. The firm’s fixed costs are $4,000,000 per year....

Lucid Images Ltd manufactures premium high definition televisions. The firm’s fixed costs are $4,000,000 per year. The variable cost of each TV is $2,000, and the TVs are sold for $3,000 each. The company sold 5,000 TVs during the previous year. (In the following requirements, ignore income taxes) Required: Treat each of the requirements as independent situations: a) Calculate the break-even point in units. b) What will the new break-even point be if fixed costs increase by 10 per cent? c) What was the company’s net profit for the previous year? d) The sales manager believes that a reduction in the sales price to $2,500 will result in orders for 1,200 more TVs each year. What will the break-even point be if the price is changed?

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Expert Solution

ANSWER:

(a).

Break Even point = Fixed costs / Contribution margin per unit

Contribution margin per unit = Sales price - Variable cost per unit

= $3,000 - $2,000

= $1,000

Break Even point = $4,000,000 / $1,000

= 4,000 units

(b).

New fixed costs = $4,000,000 * 1.10

= $4,400,000

Break Even point = $4,400,000 / $1,000

= 4,400 units

(c).

Net profit = [(Selling price - Variable cost per unit) * units] - Fixed costs

= [($3,000 - $2,000) * 5,000] - $4,000,000

= ($1,000 * 5,000) - $4,000,000

= $5,000,000 - $4,000,000

= $1,000,000

(d).

New sales price = $2,500

Break Even point = Fixed costs / Contribution margin per unit

Contribution margin per unit = Sales price - Variable cost per unit

= $2,500 - $2,000

= $500

Break Even point = $4,000,000 / $500

= 8,000 units

=================

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ekkarill92 answered 2 years ago
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