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Computing projected operation profit and break-even points

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JetSet Travel, Inc. expects to become very successful in the manufacture and sales of its new luggage line. This luggage will be sold at about $300 per set.

JTI executive staff has asked you to provide them a slide presentation in the next staff meeting which gives calculations for profit and break-even. This presentation will be the basis of the meeting discussion.

Assume that JTI's annual fixed costs for the luggage line are $500,000, and its variable cost per luggage set is $100.

1. Compute JTI's break-even point for the number of luggage sets and dollars of sales.

2. Suppose JTI plans to sell 3,600 luggage sets in 2008. Compute JTI's projected operating profit.

3. Suppose JTI increased its fixed costs by $100,000 and reduced variable costs per luggage set by $25. Compute its operating profit if 3,600 luggage sets are sold. Compute the break-even point. Comment on your results.

4. Next, ignore requirement 3. Suppose fixed costs do not change, but variable costs increase by 15% before deliveries of luggage sets begin for the year. Compute the new break-even point.

Solution Preview

1. Compute JTI's break-even point for the number of luggage sets and dollars of sales.
Total Sales = 300x
Total Costs = FC + x*VC = 500,000 + 100x
For break-even, 300x = 500,000 + 100x
Or 200x = 500,000 → x = 500,000/200 = 2500
At x = 2500, total sales = 300*2500 = $750,000

2. Suppose JTI plans to sell 3,600 luggage sets in 2008. Compute JTI's projected operating profit. ...

Solution Summary

This solution uses detailed calculations and step-by-step work to find the answer to each of the required problems.

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