Question

Founded nearly 50 years ago by Alfred Lester-Smith, Beautiful Clocks specializes in developing and marketing a diverse line of large ornamental clocks for the nest homes. Tastes have changed over the years, but the company has prospered by continually updating its product line to satisfy its auent clientele. The Lester-Smith family continues to own a majority share of the company and the grandchildren of Alfred Lester-Smith now hold several of the top managerial positions. One of these grandchildren is Meredith Lester-Smith, the new CEO of the company. Meredith feels a great responsibility to maintain the family heritage with the company. She realizes that the company needs to continue to develop and market exciting new products. Since the 50th anniversary of the founding of the company is rapidly approaching, she has decided to select a particularly special new product to launch with great fanfare on this anniversary. But what should it be? As she ponders this crucial decision, Meredith’s thoughts go back to the magnicent grandfather clock that her grandparents had in their home many years ago. She had admired the majesty of that clock as a child. How about launching a modern version of this clock? This is a dicult decision. Meredith realizes that grandfather clocks now are largely out of style. However, if she is so nostalgic about the memory of the grandfather clock in her grandparents’ home, wouldn’t there be a considerable number of other relatively wealthy couples with similar memories who would welcome the prestige of adding the grandeur of a beautifully designed limited-edition grandfather clock in their home? Maybe. This also would highlight the heritage and continuity of the company. It all depends on whether there would be enough sales potential to make this a protable product. Meredith had an excellent Business Analytics course at JMU, so she realizes that breakeven analysis is needed to help make this decision. With this in mind, she instructs several sta members to investigate this prospective product further, including developing estimates of the related costs and revenues as well as forecasting the potential sales. One month later, the preliminary estimates of the relevant nancial gures come back. The cost of designing the grandfather clock and then setting up the production facilities to produce this product would be approximately $250,000. There would be only one production run for this limited-edition grandfather clock. The additional cost for each clock produced would be roughly $2,000. The marketing department estimates that their price for selling the clocks can be successfully set at about $4,500 apiece, but a rm forecast of how many clocks can be sold at this price has not yet been obtained. However, it is believed that the sales likely would reach into three digits. The production oor chief has estimated a maximum operating capacity of 500 clocks. 1. If the company changes the selling price per clock from $4,500 to $5,000, this will .................. (increase/decrease) the breakeven volume from .................. to .................. clocks. 2. How small can the selling price be before the grandfather clocks cease to be protable? .................. 3. The relationship between price and breakeven percentage of maximum production capacity is .................. (linear/nonlinear), because .......................................................................................... 4. Raising the selling price to $5,000 per clock will .................. (increase/decrease) the net prot from ............... to .................., assuming the variable cost remains $2,000 and the sales volume is 300 clocks. 5. How large can the setting-up costs be before the grandfather clocks cease to be protable? .................. 6. How large can the cost per unit be before the grandfather clocks cease to be protable? .................. 7. Now suppose that 300 grandfather clocks are produced but only 200 are sold. Would it still be protable to produce and sell the grandfather clocks under this circumstance? .................. (Yes/No) because ........................... .................................... 8. If 300 grandfather clocks are produced, what would be the minimum amount to be sold in order to break even

Answer 1

Solution:

Fixed cost associated with production=$250,000

Variable cost per unit=$2000

Sale price per unit=$4500

Contribution per unit=$4500-$2000=$2500

Break even volume=Fixed cost/Contribution per unit

=$250,000/$2500

=100 clocks

a)Decrease(since increase sale price means higher contribution per unit);

b)100 clocks

c)New Break even volume=$250,000/($5000-$2000)=83 clocks(approx)

d)Let the selling price be X

No. of unit to be sold=500 clocks

500*X-$2000*500-$250,000=$0

500X=$125000

X=$125000/500

=$2500 per clocks.