Jennifer is considering opening a music store. She wants to estimate the number

Question

Jennifer is considering opening a music store. She wants to estimate the number of CDs he must sell to break even. The CDs will be sold for $13.98 each, variable operating costs are $10.48 per CD, and annual fixed operating costs are $73,500.

a. Find the operating breakeven point in number of CDs.
b. Calculate the total operating costs at the breakeven volume found in part a.
c. If Jennifer estimates that at a minimum he can sell 2,000 CDs per month should he go
into the music business?
d. How much EBIT will Jennifer realize if he sells the minimum 2,000 CDs per month
noted in part c?

Explanation / Answer

(a) Contribution towards profit per CD = selling cost - variable operating cost = 13.98 - 10.48 = $3.50 For break even.... No. of CD's sold * Contribution profit per CD = fixed operating cost N * 3.50 = 73500 therefore N = 21000....hence breakeven will occur when she sells 21000 CDs (B) Total operating cost = Fixed operating cost + N * variable operating cost = 73500 + 21000 * 10.48 = $293,580 (C) Since for break even she has to sell 21000 CDs annually.... and if she sells 2000 per month that means 24000 annually.... So she can enter the CD business as she has a profit... (D) Since break-even was achieved at 21000 and she sold 24000... The total EBIT earnings would correspond to the profit from the 3000 CDs over the break-even point... Total earnings = 3000 * 3.5 (3.5 is earlier calculated contribution to profit per CD) Therefore... Total EBIT = $10,500 (EBIT means earnings b4 interests and taxes)

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