Breakeven Analysis of Several Firms

3. Ensco Lighting Company has fixed costs of $100,000, sells its units for $28, and has variable costs of $15.50 per unit.

a. Compute the break-even point.
b. Ms. Watts comes up with a new plan to cut fixed costs to $75,000. However, more labor will now be required, which will increase variable costs per unit to $17. The sales price will remain at $28. What is the new break-even point?
c. Under the new plan, what is likely to happen to profitability at very high volume levels (compared to the old plan)?

4. Air Filter, Inc., sells its products for $6 per unit. It has the following costs:

Rent .....................................................$100,000
Factory labor ..........................................$ 1.20 per unit
Executive salaries .................................... $ 89,000
Raw material .......................................... $ .60 per unit

Separate the expenses between fixed and variable cost per unit. Using this information and the sales price per unit of $6, compute the break-even point.

6. Gibson & Sons, an appliance manufacturer, computes its break-even point strictly on the basis of cash expenditures related to fixed costs. Its total fixed costs are $ 1,200,000, but 25 percent of this value is represented by depreciation. Its contribution margin (price minus variable cost) for each unit is $2.40. How many units does the firm need to sell to reach the cash break-even point?

7. Draw two break-even graphs ---- one for a conservation firm using labor-intensive production and another capital-intensive firm. Assuming these companies compete within the same industry and have identical sales, explain the impact of changes in sales volume on both firms' profits.

PS> To complete #7, use the hyperlink below to get access to the Excel worksheet. http://highered.mcgraw-hill.com/sites/dl/free/0072842296/120455/chapter 5.xls

10. University of Catering sells 50-pound bags of popcorn to university dormitories for $10 a bag. The fixed costs of this operation are $ 80,000, while the variable costs of the popcorn are $.10 per pound.

a. What is the break-even point in bags?
b. Calculate the profit or loss on 12,000 bags and on 25,000 bags.
c. What is the degree of operating leverage at 20,000 bags and at 25,000 bags? Why does the degree of operating leverage change as the quality sold increases?

20. Mr. Katz is a widget business. He currently sales 2 million widgets a year at $ 4 each. His variable cost to produce the widgets is $3 per unit, and he has $1,500.00 in fixed costs. His sales-to-assets ratio is four times, and 4 % f his assets are financed with 9 % debt, with the balance financed by common stock at $10per share. The tax rate is 30 %.

His brother-in-law, Mr. Doberman, says Mr. Katz is doing it all wrong. By reducing the prices to $3.75 a widget, he could increase his volume of units sold by 40 %. Fixed costs would remain constant, and variable costs would remain at $3 per unit. His sales-to-ratio would be 5 times. Furthermore, he could increase his debt-to-assets ratio to 50 %, with the balance in common stock. It is assumed that the interest rate would go up by 1 % and the price of stock would remain constant.

a. Compute earnings per share under the Katz plan.
b. Compute earnings per share under the Doberman plan.
c. Mr. Katz's wife does not think the fixed costs would remain constant under the Doberman plan but that they would go up by 20 %. If this is the case, should Mr. Katz shift to the Doberman plan, based on earning per share?

Reference

Block. S. , Hirt, G. (2005) Foundations of Finanial Management (11th ed). Irwin/McGraw Hill, Burr Ridge, IL