Question

Dynamic Defenses Corporation is considering a project that will have fixed costs of $10,000,000. The product will be sold for $37.50 per unit, and will incur a variable cost of $10.75 per unit. units to break even on this project (QBE). Given Dynamic Defenses's cost structure, it will have to sell Dynamic Defenses Corporation's marketing sales director doesn't think that the market for the firm's goods is big enough to sell enough units to make the company's target operating profit of $20,000,000. In fact, she believes that the firm will be able to sell only about 150,000 units. However, she also thinks the demand for Dynamic Defenses Corporation's product is relatively inelastic, so the firm can increase the sale price. Assuming that the firm can sell 150,000 units, what price must it set to meet the CFO's EBIT goal of $20,000,000? $242.36 $210.75 $221.29 $263.44

Answer 1

(a) Fixed Cost = F = $10000000

Sales Price = S = $37.50

Variable Cost = V = $10.75

Let Breakeven point be x

At breakeven, Sales = Total Costs

=> Sales = Fixed Costs + Variable Costs

=> 37.50x = 10000000 + 10.75x

=> x = 10000000/(37.50 - 10.75) = 373831.77 units or 373832 units

(b) EBIT = $20000000

Number of units = 150000

Let Selling Price be S

Total Cost = Fixed Cost + Variable Cost = 10000000 + 10.75*150000 = $11612500

Revenue = 150000*S

EBIT = Revenue - Cost

=> 20000000 = 150000S - 11612500

=> S = (20000000 + 11612500)/150000 = $210.75