1. Break-even analysis To be profitable, a firm must recover its costs. These costs include both its fixed and its variable costs. One way that a firm evaluates at what stage it would recover the invested costs is to calculate how many units or how much in dollar sales is necessary for the firm to earn a profit. Consider the case of Petrox Oil Co.: Petrox Oil Co. is considering a project that will have fixed costs of $10,000,000. The product will be sold for $37.50 per unit, and will incur a variable cost of $11.25 per unit. Given Petrox's cost structure, it will have to sell units to break even on this project (QBE). Petrox's marketing and sales director doesn't think that the firm's market is big enough for the firm to break even. In fact, she believes that the firm will be able to sell only about 150,000 units. However, she also thinks that the demand for Petrox's product is relatively inelastic (so the firm can increase the sales price without significantly decreasing the volume of product sold). Assuming that the firm can sell 150,000 units, what price must it set to break even? $85.71 per unit $77.92 per unit $93.50 per unit $74.02 per unit image 1
1. Break-even analysis To be profitable, a firm must recover its costs. These costs include both its fixed and its variable costs. One way that a firm evaluates at what stage it would recover the invested costs is to calculate how many units or how much in dollar sales is necessary for the firm to earn a profit. Consider the case of Petrox Oil Co.: Petrox Oil Co. is considering a project that will have fixed costs of $10,000,000. The product will be sold for $37.50 per unit, and will incur a variable cost of $11.25 per unit. Given Petrox's cost structure, it will have to sell units to break even on this project (QBE). Petrox's marketing and sales director doesn't think that the firm's market is big enough for the firm to break even. In fact, she believes that the firm will be able to sell only about 150,000 units. However, she also thinks that the demand for Petrox's product is relatively inelastic (so the firm can increase the sales price without significantly decreasing the volume of product sold). Assuming that the firm can sell 150,000 units, what price must it set to break even? $85.71 per unit $77.92 per unit $93.50 per unit $74.02 per unit image 1
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:1. Break-even analysis
To be profitable, a firm must recover its costs. These costs include both its fixed and its variable costs. One way that a firm evaluates at what stage it
would recover the invested costs is to calculate how many units or how much in dollar sales is necessary for the firm to earn a profit.
Consider the case of Petrox Oil Co.:
Petrox Oil Co. is considering a project that will have fixed costs of $10,000,000. The product will be sold for $37.50 per unit, and will
incur a variable cost of $11.25 per unit.
Given Petrox's cost structure, it will have to sell
units to break even on this project (QBE).
Petrox's marketing and sales director doesn't think that the firm's market is big enough for the firm to break even. In fact, she believes that the firm
will be able to sell only about 150,000 units. However, she also thinks that the demand for Petrox's product is relatively inelastic (so the firm can
increase the sales price without significantly decreasing the volume of product sold). Assuming that the firm can sell 150,000 units, what price must it
set to break even?
$85.71 per unit
O $77.92 per unit
$93.50 per unit
O $74.02 per unit
image 1
Transcribed Image Text:What affects the firm's operating break-even point?
Several factors affect a firm's operating break-even point. Based on the scenarios described in the following table, indicate whether these factors
would increase, decrease, or leave unchanged a firm's break-even quantity-assuming that only the listed factor changes and all other relevant factors
remain constant.
The firm's fixed costs increase.
The firm's tax rate increases.
The variable cost per unit decreases.
Increase Decrease No Change
O
O
O
O
O
When a large percentage of a firm's costs are fixed, the firm is said to have a
degree of operating leverage.
image 2
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