Rob is considering investing in a new method of cleaning carpet that will cost h

Question

Rob is considering investing in a new method of cleaning carpet that will cost him more both in fixed and variable costs, but will allow him to charge more. He wants to know what his total sales will be for both his current method and the new method at his breakeven point. You will need to calculate his breakeven for both methods first and then determine his total sales for BOTH to give him the information he needs. Be sure you round up to the nearest whole carpet.

Remember the current has these factors:

Price to clean a carpet = $75

Material (variable costs) = $15

Monthly fixed costs = $4000

The new method has these factors:

Fixed cost: $4750

Variable costs per carpet: $18.50

Price per carpet: $99

What are Rob's sales for the current method AND the new method, in that order?

1) $5010 and $5841

2) $5025 and $5950

3) $5025 and $5841

4) $5005 and $5775

5) There is not enough information to determine this

Explanation / Answer

Current method analysis:

Breakeven point = Fixed costs/(sales price per unit - variable cost per unit)

= 4000/(75 - 15)

= 66.67 carpets or 67 carpets per month (rounded off)

Break even sales amount per month = revenue per carpet*no. of carpets for break even = 75*67 = $5,025

New method analysis:

Break even point = 4750/(99-18.50) = 59.01 carpets or 59 carpets per month (rounded off)

Break even sales per month = $99*59 carpets = $5,841

Thus the answer is option "3" - $5025 and $5841

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