Question

BREAK-EVEN ANALYSIS

The Warren Watch Company sells watches for $26, fixed costs are $150,000, and variable costs are $12 per watch.

1. What is the firm's gain or loss at sales of 7,000 watches? Enter loss (if any) as negative value. Round your answer to the nearest cent.
   $
   
   What is the firm's gain or loss at sales of 17,000 watches? Enter loss (if any) as negative value. Round your answer to the nearest cent.
   $
2. 
   
3. What is the break-even point (unit sales)? Round your answer to the nearest whole number.
   units
4. 
   
5. What would happen to the break-even point if the selling price was raised to $31?
   -Select-The result is that the break-even point remains unchanged. The result is that the break-even point is lower. The result is that the break-even point is higher.
6. 
   
7. What would happen to the break-even point if the selling price was raised to $31 but variable costs rose to $26 a unit? Round your answer to the nearest whole number.
   -Select-The result is that the break-even point remains unchanged.The result is that the break-even point increases. The result is that the break-even point decreases.

Answer 1

Answer of Part a:

Selling price per unit = $26

Variable cost per unit = $12

Total Sales = Unit * Selling price per unit
Total Sales = 7,000 * $26
Total Sales = $182,000

Total Cost = Fixed Cost + Variable Cost
Total Cost = $150,000 + ($12 * 7,000)
Total Cost = $150,000 + $84,000
Total Cost = $234,000

Loss = Sales – Cost
Loss = $182,000 - $234,000
Loss = -$52,000

Answer of Part b:

Selling price per unit = $26

Variable cost per unit = $12

Total Sales = Unit * Selling price per unit
Total Sales = 17,000 * $26
Total Sales = $442,000

Total Cost = Fixed Cost + Variable Cost
Total Cost = $150,000 + ($12 * 17,000)
Total Cost = $150,000 + $204,000
Total Cost = $354,000

Gain = Sales – Cost
Gain = $442,000 - $354,000
Gain = $88,000

Answer of Part c:

Contribution Margin per unit = Selling price per unit – Variable Cost per unit
Contribution Margin per unit = $26 - $12
Contribution Margin per unit = $14

Break Even Point in Units = Fixed Cost / Contribution Margin per unit
Break Even Point in Units = $150,000 / $14
Break Even Point in Units = 10,714 unit

Answer of Part d:

Contribution Margin = New Selling price per unit – Variable cost per unit
Contribution Margin per unit = $31 -$12
Contribution Margin per unit = $19

Break Even Point in Units = Fixed Cost / Contribution Margin per unit
Break Even Point in Units = $150,000 / $19
Break Even Point in Units = 7,895 units

Due to increase in selling price the break-even point is lower