Question

Lucid Images Ltd manufactures premium high definition televisions. The firm’s fixed costs are $4,000,000 per year. The variable cost of each TV is $2,000, and the TVs are sold for $3,000 each. The company sold 5,000 TVs during the previous year. (In the following requirements, ignore income taxes)

Required: Treat each of the requirements as independent situations:

a) Calculate the break-even point in units.

b) What will the new break-even point be if fixed costs increase by 10 per cent?

c) What was the company’s net profit for the previous year?

d) The sales manager believes that a reduction in the sales price to $2,500 will result in orders for 1,200 more TVs each year. What will the break-even point be if the price is changed?

Answer 1

a.

Break Even point = Fixed costs / Contribution margin per unit

Contribution margin per unit = Sales price - Variable cost per unit

= $3,000 - $2,000

= $1,000

Break Even point = $4,000,000 / $1,000

= 4,000 units

b.

New fixed costs = $4,000,000 * 1.10

= $4,400,000

Break Even point = $4,400,000 / $1,000

= 4,400 units

c.

Net profit = [(Selling price - Variable cost per unit) * units] - Fixed costs

= [($3,000 - $2,000) * 5,000] - $4,000,000

= ($1,000 * 5,000) - $4,000,000

= $5,000,000 - $4,000,000

= $1,000,000

d.

New sales price = $2,500

Break Even point = Fixed costs / Contribution margin per unit

Contribution margin per unit = Sales price - Variable cost per unit

= $2,500 - $2,000

= $500

Break Even point = $4,000,000 / $500

= 8,000 units