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Break-Even units, Expected Profit and Probability of Profit

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The ABC Company is considering the sale of a new product. The fixed costs associated with the product are $1,750. The product will sell for $4.00 per unit and the variable costs are $1.50 per unit. The expected demand is 1,000 units. The demand is expected to follow a normal distribution with a standard deviation (sigma) of 150.

How many units have to be sold to break even?
What is the expected profit if the product is carried?
What is the expected probability that this product will be profitable?

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Solution Summary

This solution calculates the break-even units, expected profit and probability of profit. It does this through the analysis of contribution margin and fixed costs, expected revenue and expected costs, and the properties of a normal distribution.

Solution Preview

Breakeven (units) = Fixed costs/Contribution margin per unit
The contribution margin per unit is $4.00 - $1.50 = $2.50
The fixed costs are ...

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