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Rosario Company: Break Even Analysis

Rosario Company, which is located in Buenos Aires, Argentina, and manufactures a component used in farm machinery. The firm's fixed costs are 4,000,000 p per year. The variable cost of each component is 2,000 p, and the compoents are sold for 3,000 p each. The company sold 5,000 components during the prior years. (p denotes the peso, Argentina's national currency. Several countries use the peso as their monetary unit. On the day this exercise was written, Agentina's peso was worth .327 U.S. dollar. In the following requirements, ignore income taxes.)

1. Compute the break-even point in units.
2. What will the new break-even point be if fixed costs increase by 10 percent?
3. What was the company's net income for the prior year?
4. The sales manager believes that a reduction in the sales price to 2,500 p will result in order for 1,200 more compoents each year. What will the break-even point be if the price is changed?
5. Should the price change discussed in requirement (4) be made?

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Solution

Fixed costs per year = 4,000,000 p
Selling Price per unit = 3000 p
Variable cost per unit = 2000 p

1) Break even Sales = Fixed Costs /(Selling price per unit-Variable cost per unit)
=4000000/(3000-2000)
=4000 units

2) Suppose fixed costs ...

Solution Summary

This solution describes the steps for finding the break even point for Rosario company. It also explains the use of break even analysis to determine whether price reduction is advisable.

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