Question

A new company to produce state-of-the-art car stereo systems is being considered by Jagger Enterprises. The sales price would be set at 1.5 times the variable cost per unit; the VC/unit is estimated to be $2.50. What sales volume would be required in order to break even, i.e., to have an EBIT of zero for the stereo business with the following assumptions of fixed costs?

A) Fixed costs are estimated at $120,000 vs. fixed costs are estimated at $100,000.
B) What do the above results suggest with regard to the operating leverage vs. business risk?

Answer 1

Solution:

The price per variable unit is set at 1.5 times the cost; the VC / unit is estimated at $2.50.

Price = 2.5 * 2.50 = $6.25

Variable cost = $2.50

Fixed cost = $220,000

Break-Even Volume = Fixed cost / (Price - Variable cost)

                                  = $220.000 / (6.25 - 2.50)

Break-Even Volume = 58,667 units