Question

Assume that the following data has been determined for the development and sale of a new...

Assume that the following data has been determined for the development and sale of a new digital thermometer for home use.
Development cost $480,000,
Sales volume 20,000 units per year,
Sales lifetime 3 years,
Production costs per unit $5

Based on the sale price determined in question 31, if the product breaks even in 2 years what is the profit expected over the estimated sales lifetime.

A) $100,000

B) $360,000

C) $240,000

D) $120,000

E) none of the other answers are correct

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Homework Answers

Answer #1

Sales per year = 20,000 units , therefore Sales in 2 years = 20000x2 = 40,000 units

Break even Sales = Fixed Costs / Contribution per unit

As mentioned in the question, in 2 years firm reaches the Break even sales ,

thus : 40000 units = $480000 / Contribution per unit

= Contribution per unit = $480000/40000 = $ 12 per unit

Computation of Profit Over estimated lifetime ( 3 years):

Total Contribution Earned = $12 x 20000 units per year x 3 years

= $720000

Profit = Contribution - Fixed Costs = $720000 - $480000 = $240000

Profit = $ 240000

Thus option C) is correct

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