Question

The Warren Watch Company sells watches for $22, fixed costs are $105,000, and variable costs are $15 per watch.

What is the firm's gain or loss at sales of 5,000 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 20,000 watches? Enter loss (if any) as negative value. Round your answer to the nearest cent.

What is the break-even point (unit sales)? Round your answer to the nearest whole number.

What would happen to the break-even point if the selling price was raised to $34? What would happen to the break-even point if the selling price was raised to $34 but variable costs rose to $24 a unit? Round your answer to the nearest whole number.

Answer 1

Gain = Sales - variable cost - fixed cost

a.gain or loss at sales of 5,000 watches = (22-15)*5,000 – 105,000

= -$70,000

b.at 20,000 watches, gain = (22-15)*20,000 – 105,000

= $35,000

Break even point = Fixed cost/Contribution margin per unit

= 105,000/(22-15)

= 15,000 units

break-even point if the selling price was raised to $34 = 105,000/(34-15)

= 5,526.31 units

break-even point if the selling price was raised to $34 but variable costs rose to $24 a unit = 105,000/(34-24)

= 10,500 units