Question

# 9. The Alfa Specialty Engineering Company (SPEC) is opening for business. The shop sells various types...

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?

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.

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