Question

To be profitable, a firm must recover its costs. These costs include both its fixed and its variable costs. One way that a firm evaluates at what stage it would recover the invested costs is to calculate how many units or how much in dollar sales is necessary for the firm to earn a profit.

Consider the case of Blue Mouse Manufacturers:

Blue Mouse Manufacturers is considering a project that will have fixed costs of $15,000,000. The product will be sold for $32.50 per unit, and will incur a variable cost of $12.80 per unit.

Given Blue Mouse’s cost structure, it will have to sell__________units to break even on this project (QBE).

A.) 393,846

B.) 121,029

C.) 761,421

D.) 262,229

Blue Mouse’s marketing and sales director doesn’t think that the firm’s market is big enough for the firm to break even. In fact, she believes that the firm will be able to sell only about 200,000 units. However, she also thinks that the demand for Blue Mouse’s product is relatively inelastic (so the firm can increase the sales price without significantly decreasing the volume of product sold). Assuming that the firm can sell 200,000 units, what price must it set to break even?

A.) $83.41 per unit

B.) $87.80 per unit

C.) $105.36 per unit

D.) $96.58 per unit

What affects the firm’s operating break-even point?

Several factors affect a firm’s operating break-even point. Based on the scenarios described in the following table, indicate whether these factors would increase, decrease, or leave unchanged a firm’s break-even quantity—assuming that only the listed factor changes and all other relevant factors remain constant.

(Choose One)

	Increase	Decrease	No Change
The firm depreciates its fixed assets more quickly over a shorter life.
The variable cost per unit decreases.
The firm’s tax rate increases.

When a large percentage of a firm’s costs are fixed, the firm is said to have a_______degree of operating leverage.

A.) Low

B.) High

Answer 1

2- Break even point =fixed cost/ (selling price- variable cost)

200000 = 15000000/(selling price-12.8)

15000000=200000*selling price-2560000

200000*selling price = 15000000+2560000

selling price =(15000000+2560000)/200000 =87.8 per unit

1-
selling price			32.5
variable cost			12.8
contribution margin			19.7
total fixed cost			15000000
break even point in units	total fixed cost/contribution margin per unit	15000000/19.7	761421
3-
The firm depreciates its fixed assets more quickly over a shorter life	Increase the level of break even point	because early recovery of depreciable asset would increase the level of total fixed cost
The variable cost per unit decreases.	Decreases the level of break even	because decrease in variable cost would results in increase in contribution margin and increased contribution margin would recover the cost at low level of Break even point
The firm’s tax rate increases	No effect	because tax does not have any impact on level of break even point
4-	High degree of operating leverage