Question

1.    Gideon currently has a fixed annual cost of $800,000, variable cost of $20 per unit, and a selling price of $50 per unit. What is Gideon’s current breakeven point?

2.    Continuing from the prior problem, Gideon is studying the possibility of expanding with a new factory because demand for their product is more than they can service in the old factory. If they proceed with this plan their annual fixed costs will increase to $1,500,000. Their variable cost per unit and selling price per unit will stay the same. What is Gideon’s new breakeven point with the new factory?

3.    Instead of expanding into the new plant, what are some other alternatives Gideon could use to meet this increased demand. Mention at least one alternative and talk about a strength of this alternative and a weakness of this alternative.

4.    Dexter Corporation projects the following units and selling prices:

                           Year 1              Year 2              Year 3              Year 4

Unit sales                                  1,000              1,500              2,000                3,000

Selling price per unit                      $10                   $12                   $15                   $18

Please calculate Dexter’s projected or proforma sales.

5.    Continuing from the prior problem, Dexter has the following fixed cost per year and variable cost per unit each year:

                                                Year 1              Year 2              Year 3              Year 4

Annual fixed costs                    $2,000              $2,100              $2,200              $2,400

Variable costs per unit                    $5                     $6                   $8                     $9

Assuming these are all the costs for Dexter. Please calculate Dexter’s projected or proforma profit.

Answer 1

	Calculation of breakeven under existing situation
1	Break even point (In Units) =	Fixed cost / Contribution per unit
			Fised cost = 800000
			Contribution = Sales - variable cost
			30	per unit
	Break even point (In Units) =	800000/30
			26,667	Units
2	Calculation of breakeven under revised situation
	If they proceed with this plan their annual fixed costs will increase to $1,500,000.
	So revised fixed cost will be 1500000.
	Variable cost per unit and selling price per unit will stay the same.
	So contribution will be 30/ unit.
	Break even point (In Units) =	1500000/30
			50,000	units
	Ways to increase the demand of the products
a	Boost Your Brands Awareness among customers
b	Show Potential Customers the Benefit of Choosing You .
c	Leverage ‘Scarcity’ to Create Demand in market
d	Take Advantage of Video Marketing among customers
e	Update Your Blog Regularly and take appropriate steps
f	Engage Your Customers
g	Ensure You Deliver Value , quality etc to customers
h	Regularly Evaluate Your Perform , also compare with competitor.
	Ensure You Deliver Value , quality etc to customers
	Advantages : When a new customers come across your brand,they are looking for a product or service that will make value addition. If they are convinced that your brand has value, they will go beyond the demand stage and make purchases.
	Disadvantages : Ensuring high value require high total quality management within the industry.
	Which will require capital investment from the management side.
	Availabilty of sufficent resources and team should have appropriate skills
3	Analysis of alternatives of Dexter corporation.
	Particulars	Year 1	Year 2	Year 3	Year 4
	Sales ( in units)	1000	1500	2000	3000
	Selling price ($)	10	12	15	18
	Variable cost per unit	5	6	8	9
	Contribution	5	6	7	9
	Total contribution (Units * contribution per unit)	5000	9000	14000	27000
	Less : Fixed cost	2000	2100	2200	2400
	Profit (In $)	3000	6900	11800	24600
	Notes :
	Year by year profit contribution and demand is increasing , so it is better to go with the project