Question

a. 13-6 BREAK-EVEN ANALYSIS The Warren Watch Company sells watches for $26, fixed costs are $155,000, and variable costs are $13 per watch. What is the firm's gain or loss at sales of 9,000 watches? At 15,000 watches? b. What is the break-even point? Illustrate by means of a chart. What would happen to the break-even point if the selling price was raised to $33? What is the significance of this analysis? d. What would happen to the break-even point if the selling price was raised to $33 but variable costs rose to $24 a unit?

Answer 1

(a.) Calculation of Firm's Gain or Loss at 9000 and 15000 units

Below is the table showing Calculation of Profit

	9000	15000
Sales	234000(9000 * 26)	390,000 (15000 * 26)
Variable Cost	117,000(9000 * 13)	195,000(15000 * 13)
Contribution (Sales - Variable Cost)	117000	195,000
Less :Fixed Cost	155,000	155,000
Net Gain/ Loss	(38000)	40,000

(b.) Breakeven Point

Break Even Point = Fixed Cost / (selling price per unit - Variable cost per unit)

= 155000 / (26 - 13)

= 11923.08 or 11923 units

Below is the chart showing Breakeven point

9000 units	11923 units	15000
Loss = (38000)	Profit/Loss = 0	Profit =40000

We can see that units below break even is giving loss , at breakeven Profit and loss is 0 and units above breakeven is giving profit.

(c.) Calculation of Breakeven point if the selling price raised to 33

Break Even Point = Fixed Cost / (selling price per unit - Variable cost per unit)

= 155000 / (33 - 13)

= 7750 units

This shows that by increasing selling price breakeven will reach faster as fixed cost is recovered. therefore this analysis helps to show that as we increase selling price per unit break weven will reach faster.

(d.) Calculation of Breakeven point if the selling price raised to 33 but variable cost rose to 24 unit

Break Even Point = Fixed Cost / (selling price per unit - Variable cost per unit)

= 155000 / (33 - 24)

= 17222.22 units 17222 units.