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Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937
Textbook Problem
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BREAK-EVEN ANALYSIS The Warren Watch Company sells watches for $26, fixed costs are $155,000, and variable costs are $13 per watch.

  1. a. What is the firm's gain or loss at sales of 9,000 watches? At 15,000 watches?
  2. b. What is the break-even point? Illustrate by means of a chart.
  3. c. What would happen to the break-even point if the selling price was raised to $33? What is the significance of this analysis?
  4. d. What would happen to the break-even point if the selling price was raised to $33 but variable costs rose to $24 a unit?

a.

Summary Introduction

To determine: The firm’s gain or loss at sales of 9,000 watches and at sales of 15,000 watches.

Introduction:

Break-even Analysis:

Break-even analysis is a type of tool used by the cost accountant professionals to find out the number of unit produced when the total cost is equal to the company revenue.

Explanation

Given information:

For 9000 units

Selling price is $26 per watch.

Fixed cost is $155,000.

Variable cost is $13 per watch.

The formula to calculate gain or loss is,

Gain or loss=[(Sale price×unit produce)[(Variable cost×unit produce)+ Fixed cost]]

Substitute $26 for sale price, 9000 units for unit produce, $13 per unit for variable cost and $155,000 for fixed cost in the above equation.

Gain or loss=[($26×9,000)[($13×9,000)+ $155,000]]=[$234,000[$117,000+$155,000]]=$38,000

The value of loss is $38,000

b.

Summary Introduction

To determine: The break-even point by means of chart.

c.

Summary Introduction

To determine: The break-even point when selling price is $33.

d.

Summary Introduction

To determine: The break-even point when selling price is $33 and variable cost is $ 24 per unit.

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