Question

Hacker Golf has developed a unique swing trainer golf club.  They currently pay a production company to produce the golf club for them at a cost of $22 each.  Other variable costs total $6 per golf club, and fixed expenses are $192,000. Hacker Golf currently sells the trainer golf club for $48.  NOTE:  Solve each requirement as a separate situation and  always go back to original data unless otherwise directed. Round all answers to nearest unit or nearest cent.

A. Calculate Hacker’s annual breakeven point in units.

B. Assume Hacker wants to earn a Profit of $120,000. How many units must it sell?

C. Hacker Golf is considering raising its selling price to $49.95.  Calculate the new breakeven point in units.

D. Hacker Golf has found a new company to produce the golf club at a lower cost of $19.  Calculate the new breakeven point in units.

E. Assume Hacker has predicted demand for its clubs to be 16,000 units.  What is the lowest price that can be charged in order to earn a $120,000 profit?

F. Assume Hacker can sell 20,000 clubs, but needs to increase advertising costs in order to stimulate the extra demand.  Assuming it wants to earn a $150,000 profit, how much can Hacker increase advertising costs by to help achieve its goal of selling 20,000 units?

G. Hacker has run into supplier problems and will only be able to sell 13,500 clubs this year because of a supplier shortage.  Assuming it has already sold 5,000 clubs at the existing price, that it can reduce monthly fixed costs by $1,000 and unit variable cost by $1, what will new price need to be in order to still earn a $120,000 profit?

H. Assume the same scenario as letter (b) but the $120,000 is after-tax profit.  How many units must Hacker sell?  Assume a tax rate of 40%.

Answer 1

A. Calculation of Breakeven Point

Selling Price per Unit = $48/unit

Production cost/unit =$22

Other variable cost/unit = $6

Total variable cost/unit = $28 ($22+$6)

Contribution margin per unit = $48 - $28 = $20

Fixed Expenses are $192,000

Breakeven Point = Total Fixed Expenses/Contribution margin per unit

Breakeven Point = 192,000/20 = 9,600

B. Desired Profit = $120,000  

Fixed Expenses are $192,000

No. of units to be sold are (Fixed Expenses+ Desired profit)/ Contribution margin per unit

No. of units to be sold are ($192,000+$120,000) / 20 = 312000/20 ie. 15,600

Hacker must sell 15,600 units to earn $120,000 as profit.

C. If the selling price is $49.95/unit and total variable costs are $28/unit(as calculated in Part A)

New Contribution margin is $21.95/unit ($49.95-$28)/unit

New Breakeven is Total Fixed Expenses/New Contribution margin per unit

New Breakeven is $192000/21.95 ie. 8747.15

Breakeven in units is 8747(after rounding off)

D. New Production cost per unit is $19/unit and the Variable cost is $6/unit

Total Variable cost is $25/unit ($19+$6)/unit

Contribution margin per unit = $23/unit ($48-$25)/unit

Breakeven units are Total Fixed Expenses/Contribution margin per unit

Breakeven units are 192,000/23 ie. 8347.82

Breakeven units are 8348(after rounding off)