1. The Automotive Supply Company has a small plant that produces speedometers ex

Question

1.       The Automotive Supply Company has a small plant that produces speedometers exclusively. Its fixed costs are $30,000, and its variable costs ar $10 per unit. It can sell a speedometer for $25.

a.       How many speedometers must the company sell to break even?

b.      What is the break even revenue?

c.       The Company sold 3,000 units last year. What was its profit?

d.      Next years fixed cost are expected to rise to $37,500. What will be the breakeven quantity?

e.      If the company will sell the number of units obtained in part d and wants to maintain the same profit as last year, what will the new price be?

2.       Writers Pleasure Inc., produces gold plated pen and pencil sets. Its plant has a fixed annual cos of $50,000, and a variable unit cost of $20. It expects to sell 5,000 sets next year.

a.       To just break even, how much will the company have to charge per set to obtain this profit?

b.      Based on its plant investment, the company requires an annual profit of $30,000. How much will it have to charge per set to obtain this profit? (Quantity sold will be 5,000 sets)

c.       If the company wants to earn a markup of 50% on its variable costs, how many sets will it have to sell at the price obtained in part b?

5.      The ABC company sells widgets at $9 each; variable unit cost is $6, and fixed cost is $60,000 per year.

         a. What is the breakeven quantity point?

         b. How many units must the company sell per year to a achieve a profit of $15,000?

         c. What will be the degree of operating leverage at the quantity sold in part a? part b?

         d. What will be the degree of operating leverage if 30,000 units are sold per year?

6.      Two companies, Perfect Lawn CO. and Ideal Grass Co. are competing in the manufacture and sale of lawn mowers. Perfect has a somewhat older plant and requires a variable cost of $150 per lawn mower; its fixed cost are $200,000 per year. Ideal

Explanation / Answer

1)

a) 30,000 / ( 25 - 10 ) = 2,000

b) 2,000 * 25 = 50,000

c) profit is 3000 * 15 - 30,000 = 15,000

d) breakeven quantity is 37500/15 = 2500

e) New price = x, where ( x - 10 )*2500 - 30000 = 15000

x = 28

2)

a) sell price = ( 50,000 + 20 * 5,000 ) / 5000 = $30

b) sell price = ( 50000 + 30000 + 20 * 5000 ) / 5000 = $36

c) 30000 = ( 30 - 20 )x - 50000

x = 8,000 units

5)

a) breakeven point is 60,000/3 = 20,000

b)75000/3 = 25000 units

c) DOL for a is 0, DOL for b is 15000/25000*9 = 1/15

d) for 30,000 units DOL is profit ( = 30,000 ) / sales( = 30000 * 9 ) = 1/9

6)

a) breakeven for perfect is 200000 / 100 = 2000units

breakeven for ideal is 400000 / 150 = 2667

b) for equal profits -200000 + 100x = 150x - 400000

x = 4,000 units

c) DOL for each company is ( profit is 200000 ) / sales is 1000000 = 1/5 = 20%

d) for 4500 units ideal would be more profitable because it has lesser variable cost and 4500 > 4000( where both the profits are the same )

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