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SAMPLE BREAKEVEN PROBLEMS

  1. Kim is considering the purchase of a plot of land next to her house and wants to cover some of the expenses by farming it.  Her real estate taxes, interest on a bank loan, and some other fixed expenses would amount to $2,000 this year. She expects to spend about $1 per bushel for labor, seed, herbicides, and pesticides.  If the going price is expected to be $2 per bushel, how many bushels will she have to harvest and sell to cover her fixed costs?
     
  2. Cloris Tool and Die, located in Cleveland, OH, enjoys a 4% share of a total market of 75,000 Class-C filtration units per year.  Cloris offers its distributors a combined margin of 35% on a retail price of $2,000 per unit.
     
    Jenna Jonson, the president, estimates that variable production costs amount to $750 per unit and fixed manufacturing costs total $275,000 per year.  In addition, shipping and packaging costs are $70,000 and the annual advertising budget is $100,000.  Cloris employs one sales representative at a salary of $40,000 per year.
     
    • A) What are Cloris' fixed costs?
       
    • B) What are Cloris' variable costs per unit?
       
    • C) What is the unit contribution?
       
    • D) What is the breakeven volume?
       
    • E) What market share is needed to achieve this volume?
       
    • F) What are Cloris' current profits?
       
    • G) Jonson expects to sell 4% more filtration units per year than she does presently by increasing her advertising budget from $100,000 to $120,000.  Alternatively, if she reduces the advertising budget by $20,000, she expects to sell 75 fewer units.  Should she raise or lower her advertising budget?  Why?
       
    • H) What would be the breakeven level (in units) if the advertising budget was raised?
       
    • I) What would be the breakeven level (in units) if the advertising budget was lowered?
       
    • J) As an alternative to the change in advertising, Jonson is considering offering 10 free filter cartridges with every filtration unit sold.  These cartridges cost Jonson $5 each.  If this offer can increase filtration unit sales by 150 units, what would be the change in total profits?

     
  3. Sesuki Mfg., Ltd. is a manufacturer of products such as electronic calculators.  Sesuki has been searching for ways to increase quality and reduce production costs to remain competitive in world markets. Increasingly, they are substituting robots, automation, and computer-controlled manufacturing systems for blue- and white-collar workers.  Sesuki is considering making some changes to automate the manufacture of its model XR-54 calculator, which retails for $15 after a markup of $5 over the factory price.  Sesuki expects to be able to sell the XR-54 for about two more years before sales will decline due to technological advances in the marketplace.  Remaining fixed costs across this period are about $1,000,000 associated with the manufacture of the XR-54, with labor allocated at a cost of about $3.00 per unit, operating costs allocated at about $2.50 per unit, and materials of $1.50 per unit.
     
    If Sesuki installs equipment to automate the production of the XR-54, costs associated with modifying the existing plant will require an additional investment of $3,000,000.  Automation will, however, lower labor requirements to about $0.15 per unit, will lower operating costs to about $0.25 per unit, and will increase materials costs by $0.10 per unit.  What is the breakeven point under each alternative course of action (do nothing vs. automate)?
     
    Sales of the XR-54 in recent years have begun to decline due to changes in technology in the marketplace.  Sesuki has a very good expectation of selling about 800,000 more units in the next two years before replacing the XR-54 with a newer model.  Which option would be most profitable under this expectation?  If Sesuki's main competitor is able to perfect and introduce a new model prior to Sesuki, Sesuki believes it will only sell about 400,000 units in the next two years.  Which option would be most profitable if this happens?  What should Sesuki do?
     
  4. Variblo sells its hairdryers to retailers who typically use a markup of about 33%.  Fixed costs are currently $300,000 per year, including an annual promotion budget of $50,000, and unit variable costs are $10.  The factory price is $20 each.  In its first year in business, last year, Variblo sold 25,000 units.  In an effort to increase market share, Variblo is considering a sales promotion in which the next 1,000 units would cost Variblo $4,000.  Should Variblo go ahead with the sales promotion campaign?  Consider qualitative as well as quantitative issues.  (Upon what is markup based?)
     
  5. Brandenburg College is starting a non-degree evening Continuing Education program as a public service.  Four courses are initially being considered, with a fee of $300 per course.  Initial promotional expenses, for newspaper advertising and a direct mail campaign, will require a budget of $5,000 per semester.  Adjunct faculty are to be hired for a fee of $2900 per course (section).  Discuss the conditions under which this program can be justified and under which it could not be justified.
     
  6. Barbara Baker and Jim Salvatori are two high school teachers who would like to start a miniature golf course at Lakeshore Mall.  The rental for the outdoor space at the mall would be 13% of gross sales.  Two other miniature golf courses are in the area, both charging $2.50 per round; a consumer survey shows that 74% of the respondents said that they would play a round of golf at the mall at a price of $2.50.  Local statistics show that there are an average of 98 days without rain between May and September.  Startup costs would require an investment of $18,000 to build and equip the course, and Sandra and Jim plan to spend another $10,000 on an initial promotional campaign; they also feel that they should initially budget another $2500 for unexpected startup expenses.  They will have to pay another person about $4500 per season to run the course.  Maintenance and repair costs are expected to run around $500 per season.  Barbara and Jim together have about $15,000 to invest, and would have to borrow the rest to build the course.  In order to make the bank payments and to pay back their own personal investment with interest, they figure that they would need about $5,000 per year for five years to break even on these startup costs.  Comment.