Question

Free Spirit Industries Inc. 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 $12.80 per unit. Given Free Spirit's cost structure, it will have to sell 404,858 units to break even on this project (QBE). Free Spirit'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 Free Spirit'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? O $75.36 per unit $62.80 per unit $59.66 per unit $69.08 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 product's sales price increases. The firm's fixed costs increase. The amount of debt increases, causing the firm's total interest expense to increase. 0 0 0

Answer 1

Contribution Per Unit = Selling Price-Variable Costs per unit 37.50-12.80 24.7 BEP The Product Sale Price increases Decreases Fixed Costs/Contribution Per unit Break Even Point The Firm Fixed costs increase Increases 10000000/24.7 The amount of debt increases, causing the firm total interest expense to increase No Change 404,858 Units Fixed Costs/ales Units Contribution Per Unit = 10000000/200000 $ 50.00 Contribution Per Unit+Variable costs Selling Price 50+12.80 62.80