Question

America Industries has successfully completed production of its “tip calculators” and would like to perform a break-even profit model analysis. The combination of equipment purchase cost and other resource and facility fixed costs total $550,000. Each calculator costs $12 to produce, but will sell for $38.

a.) How many calculators does Kramerica need to sell in order to achieve a volume break-even point? – (30 points)

b.) What is the corresponding revenue break-even point? – (30 points)

c.) How can America use the volume break-even point value calculated in part (a)? NOTE: The Excel spreadsheet can be very useful for this part as it performs many of these calculations.) – (25 points). In other words:

a.) What types of recommendations would you make to America if the expected number of calculator sales is 22,000 over the next year? (i.e., Are they going to be profitable; if so, by how much?

b.) Is there going to be a loss; if so, how much? If there is a loss, what might you recommend?).

d.) Please sketch a plot of the “Revenues and Costs” versus the “Number of Calculators”, and include both the total revenue and total cost lines, and also the volume and revenue break-even points (you can do this manually). Clearly label the x-axis and y-axis, and indicate the points of Fixed Costs, volume break-even point, and revenue break-even point. – (15 points)

Answer 1

a)

Breakeven point in units = Fixed expenses/Contribution margin per unit

                                             = Fixed expenses/ (Sales – Variable cost)

                                             = $ 550,000/ ($ 38 - $ 12)

                                             = $ 550,000/ $ 26 = 21,153.85 or 21,154 units

b)

Breakeven point in $ = Breakeven point in units x Sales per unit

                                       = 21,154 x $ 38 = $ 803,852

c)

Breakeven point in units can be used to compute operating profit or loss of the company.

If America Industries sells more than 21,154 units get a profit. If sales are less than 21,154 units, there will be an operating loss.

a) If sales are 22,000 units, there will be a profit as all the costs are covered in 21,154 units.

b)

Sales revenue ($ 38 x 22,000)	$                     836,000
Less: Variable cost ($12 x 22,000)	$                     264,000
Total contribution	$                     572,000
Less: Fixed cost	$                     550,000
Profit	$                       22,000

For sales of 22,000 units there will be profit of $ 22,000

*** Answer for four subparts.