Question

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To be profitable, a firm has recover its costs. These costs include both its fixed and its variable costs. One way that a firm evaluates at what stage it would recover the invested costs is to calculate how many units or how much in dollar sales is necessary for the firm to earn a profit. Consider the case of Petrox Oil Co.: Petrox Oil Co. is considering a project that will have fixed costs of $15,000,000. The product will be sold for $41.50 per unit, and will incur a variable cost of $12.80 per unit. Given Petrox's cost structure, it will have to sell units to break even on this project (QBE). Petrox's marketing and sales director doesn't think that the firm's market is big enough for the firm to break even. In fact, she believes that the firm will be able to sell only about 200,000 units. However, she also thinks that the demand for Petrox's product is relatively inelastic (so the firm can increase the sales price without significantly decreasing the volume of product sold). Assuming that the firm can sell 200,000 units, what price must it set to break even? $83.41 per unit O $96.58 per unit $105.36 per unit O $87.80 per unit What affects the firm's operating break-even point? Several factors affect a firm's operating break-even point. Based on the scenarios described in the following table, indicate whether these factors would increase, decrease, or leave unchanged a firm's break-even quantity-assuming that only the listed factor changes and all other relevant factors remain constant. Increase Decrease No Change The firm's fixed costs increase. The product's sales price increases. 0 0 0 0 0 0 The firm's tax rate increases. When a large percentage of a firm's costs are fixed, the firm is said to have a degree of operating leverage.

1) 122,137 / 337,913 / 522,648 / 308,434

2) low / high

Answer 1

1)	Contribution Margin Per Unit = Sales price - variable cost per unit
	= $41.5-12.8
	= $28.7 per unit
	Break-even Point In Unit = Fixed Cost/ Contribution Margin Per Unit
	= $15000000/28.7
	=522648 units
2)	Price to break even
	Let us assume price as X
	$15000000 = (X*200000)-(200000*$12.80)
	200000X =$15000000+2560000
	X = 87.80
	Selling price = $87.80
3)	Fixed cost increase		Increase
	Sales Price Increases		Decrease
	Tax Rate Increases		No Change
4)	High