Question

1. Break-even analysis To be profitable, a firm must 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 Blue Mouse Manufacturers: Blue Mouse Manufacturers is considering a project that will have fixed costs of $12,000,000. The product will be sold for $37.50 per unit, and will incur a variable cost of $11.25 per unit. Given Blue Mouse's cost structure, it will have to sell units to break even on this project (QBE). Blue Mouse'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 175,000 units. However, she also thinks that the demand for Blue Mouse'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 175,000 units, what price must it set to break even? $95.78 per unit $75.83 per unit $87.80 per unit $79.82 per unit

Answer 1

Breakeven units =Fixed Costs/(Sales Price-variable Costs) =12000000/(37.50-11.25) =457142.86

Number of Units*Price per unit =Fixed Costs+Breakeven Units*Variable Costs
Price per unit =(Fixed Costs+Breakeven Units*Variable Costs)/Number of Units =(12000000+175000*11.25)/175000=79.82
(Option d is correct option)

1. With increase in depreciation operating breakeven point has no change.

2. With increase in firm's tax rate operating breakeven point has no change.

3.When Variable cost decreases then operating breakeven point decreases.

Higher the operating leverage more will be its business risk.