Question

4. Problem 13.06 Click here to read the eBook: Business and Financial Risk BREAK-EVEN ANALYSIS The Warren Watch Company sells watches for $24, fixed costs are $110,000, and variable costs are $11 per watch. a. What is the firm's gain or loss at sales of 9,000 watches? Enter loss (if any) as negative value. Round your answer to the nearest cent. What is the firm's gain or loss at sales of 18,000 watches? Enter loss (if any) as negative value. Round your answer to the nearest cent. b. What is the break-even point (unit sales)? Round your answer to the nearest whole number. units c. What would happen to the break-even point if the selling price was raised to $31? -Select- d. What would happen to the break-even point if the selling price was raised to $31 but variable costs rose to $21 a unit? Round your answer to the nearest whole number. -Select-

Answer 1

Gain = Sales – variable costs – Fixed costs

a.Gain = (24-11)*9,000 – 110,000

= $7000

i.e. GAIN

b.Gain = 18000*13 – 110000

= $124000

i.e. gain

c.Break even unit sales = Fixed costs/(Selling price per watch – variable cost per watch)

= 110,000/13

= 8461.54 watches

c. The result is that the break-even point decreases. Since contribution margin will increase

d.The result is that the break even point is higher. since contribution margin will decrease.