Question

9. The Alfa Specialty Engineering Company (SPEC) is opening for business. The shop sells various types of unique hydraulic system replacement parts. • A system engineering firm has offered to buy 1,500 specialty items for $10,000. • Fixed costs for one month = $4,000 • SPEC has priced the items at $8.00 each. • Variable cost per item = $6.00. Questions:

a. Calculate SPEC’s operating breakeven point.

b. Calculate SPEC’s EBIT on the order.

c. If SPEC renegotiates the contract at a price of $ 10.00 per item, what will the EBIT be?

d. If the systems engineering firm refuses to pay more than $ 8.00 per unit but is willing to negotiate quantity, what quantity of items will result in an EBIT of $ 4,000?

***should the contribution margin ratio (25%) be included when solving this problem, and if so, why?

Answer 1

a. Contribution per unit = $8 - $6 = $2 per unit

Break even point = Fixed costs / Contribution per unit = 4,000 / 2 = 2,000 units

b.

Sales	10,000
Less:Variable Cost [6*1500]	9,000
EBIT on the order	1,000

c.

Sales [1500*10]	15,000
Less:Variable Cost [6*1500]	9,000
EBIT on the order	6,000

d. Desired EBIT= $4,000

Let the units be x

(8-6) x = 4000

x = 2000 units

Fixed cost is not considered for EBIT on the order since it has to incurred irrespective of the special order.