Question

1. Myers Corporation is attempting to develop and market a new garden tractor. Fixed cost to develop and produce the new tractor are estimated to $10,000,000 per year. The variable cost to make each tractor has been estimated at $2000. The marketing department has recommended a price of $4000 per tractor. (SHOW WORK)

1. What is the breakeven level of output for the new tractor.

2. What if management expects to generate a target profit (EBIT) of $2,000,000, how many tractors must be sold.

Answer 1

a)Break even level of output = fixed expenses/contribution margin per unit

Contribution margin per unit = selling price - variable expenses per unit

= $4000 - $2000 = $2000

Break even point in unit's = $10000000/$2000 = 5000 units.

Break even point in dollars = 5000× $4000 = $20000000

b) unit sold to attain target profit = target profit + fixed expenses/contribution margin per unit

= $2000000+$10000000/$2000 = 6000units

6000 units to be sold to attain EBIT of $2000000

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