Ensco Lighting Company: Compute the break-even point and evaluate profitability
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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)?
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Solution Summary
This solution uses simple calculations to compute break even point as well as discusses how volume level will change proftis.
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a)
Selling price = $28
variable cost = $15.50
Fixed cost = $100,000
Break even point = Fixed cost /(Selling price - Variable cost)
=100000/(28-15.50)
=8000 ...
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