i) Calculate the firm’s breakeven point (BEP), assuming its initial estimates are accurate. (ii) Perform a sensitivity analysis by calculating the breakeven point for all combinations of the sales price per unit and variable cost per unit as mentioned in the above information. (iii) In the best case, state how many units the firm will need to sell to break even. (iv) In the worst case, state how many units the firm will need to sell to break even.
Flash Manufacturing (FM) is considering a new product and is unsure about its
price as well as the variable cost associated with it. FM’s marketing department
believes that the firm can sell the product for $500 per unit but feels that if the
initial market response is weak, the price may have to be 20% lower in order to be
competitive with existing products. The firm’s best estimates of its costs are fixed
costs of $3.6 million and variable costs of $325 per unit. Concern exists with
regard to the variable cost per unit due to currently volatile raw material and labor
costs. Although the firm expects this cost to be about $325 per unit, but it could be
as much as 8% above that value. The firm expects to sell about 50,000 units per
year.
(i) Calculate the firm’s breakeven point (BEP), assuming its initial estimates are
accurate.
(ii) Perform a sensitivity analysis by calculating the breakeven point for all
combinations of the sales price per unit and variable cost per unit as
mentioned in the above information.
(iii) In the best case, state how many units the firm will need to sell to break even.
(iv) In the worst case, state how many units the firm will need to sell to break even.
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