Founded nearly 50 years ago by Alfred Smith, Beautiful Clocks specializes in dev

Question

Founded nearly 50 years ago by Alfred Smith, Beautiful Clocks specializes in developing and marketing a diverse line of large ornamental clocks for the finest homes. Tastes have changed over the years, but the company continually updates its lines to satisfy customer style and its affluent clientele. The Lester-Smith family continues to own a majority share of the company and the grandchildren of Alfred Lester-Smith now hold several managerial positions. On of these grandchildren is Meredith Lester-Smith, the new CEO of the company. Meredith feels a great responsibility to maintain the family heritage. She realizes the company must continue to develop and market exciting products. Since the 50th anniversary of the company is approaching, she has decided to select a particularly special new product to launch with great fanfare on the anniversary. But what should it be? As she ponders this crucial decision, Meredith recalls the magnificent grandfather clock that her grandparents had in their home many years ago. How about launching a modern version of this clock? This is a difficult decision. Grandfather clocks have gone out of style. However, if she is so nostalgic about the grandfather clock in her grandparent's home, wouldn't there be similar wealthy couples with similar memories who would welcome the opportunity to purchase a limited edition clock. It would all depend on whether there is enough sales potential to make a profitable product. Meredith realizes that a break-even analysis is needed to help make this decision. She instructs several staff members to perform an analysis, developing estimates of related costs and revenues as well as forecasting potential sales. One month later the financial figures are available. The cost of designing the grandfather clock and then setting up the production facilities to produce this product would be approximately $250,000. There would only be one production run for the limited edition clock. The additional cost per clock produced would roughly be $2,000. The marketing department estimates they would sell each clock for $4,500 a piece, but a firm forecast of how many of such clocks would be sold has not yet been obtained. However, it is believed that the sales would reach into three digits. Meredith wants all these numbers pinned down considerably further but feels that some analysis can be done to achieve preliminary conclusions.

a. A fairly reliable forecast has now been obtained which says that the company could possibly sell 300 such clocks. What is the minimum price that Meredith could sell these clocks before the clocks cease to be profitable. That is, what is the minimum break-even price she could charge. Round to two decimal places. b.Assuming that 300 clocks will be sold, and the variable cost per clock remains at $2000, and the revenue per clock is $4,500, how large can the fixed costs be before the grandfather clocks cease to be profitable? c.Now suppose that 300 grandfather clocks are produced, but only 200 are sold. State the profit/loss to produce and sell the grandfather clocks under this circumstance. Assume original production costs and revenue.

Explanation / Answer

Since the tastes of people have changed over time and the 50th anniversaty is approaching the company should launch a product which should be according to need of the time and long lasting at minimum price possible to attact new customers as well as old customers.

As per the question the cost of designing the grandfather clock and then setting up the production facilities to produce this product would be approximately $250,000 i.e. Fixed cost. There would only be one production run for the limited edition clock. The additional cost per clock produced would roughly be $2,000 i.e. Marginal cost.
The marketing department estimates they would sell each clock for $4,500 i.e. price a piece

a) Break even priceis where TR = TC so we will have

P*Q = FC + VC
P*300 = 250000 + 2000*300
P = 85000/300 = 2130.33

b) If 300 clocks sold and VC per clock remains at $2000 the revenue will be $4500 then the fixed cost will be
4500*300 - 2000*300 = 750000 before the grandfather clocks cease to be profitable

c) If 300 grandfather clocks are produced but only 200 are solve then we will have

Profit = 4500*200 - 300*2000- 250000 = $50,000

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