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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

BREAK-EVEN ANALYSIS The Weaver Watch Company sells watches for $25, fixed costs are $140,000, and variable costs are $15 per watch.

  1. a. What is the firm’s gain or loss at sales of 8,000 watches? At 18,000 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 $31? What is the significance of this analysis?
  4. d. What would happen to the break-even point if the selling price was raised to $31 but variable costs rose to $23 a unit?

a.

Summary Introduction

To determine: The firm’s gain or loss at sales of 8,000 items and 18,000 items.

Break-even analysis:

The break-even analysis is an analysis that helps a business in understanding the need to sell its goods monthly or yearly, so as to cover the costs incurred in doing business.

Explanation

Calculate the firm’s gain or loss at sales of 8,000 items as shown below.

Particulars Amount ($)
Sales 200,000
    Less: Variable cost 120,000
Contribution 580,000
    Less: Fixed Cost 140,000
Loss (60,000)

Table – 1

Therefore, the firm’s loss at sales of 8,000 items is $60,000.

Calculate the firm’s gain or loss at sales of 18,000 items as shown below...

b.

Summary Introduction

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

c.

Summary Introduction

To determine: The break-even point when the selling price is raised to $31.

d.

Summary Introduction

To determine: The break-even point when the selling price is raised to $31 and variable cost rose to $23 a unit.

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