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 Dynamic Defenses Corporation: Dynamic Defenses Corporation is considering a project that will have fixed costs of $12,000,000. The product will be sold for $32.50 per unit, and will incur a variable cost of $10.75 per unit.   1) Given Dynamic Defenses’s cost structure, it will have to sell (551,724/330,769/116,012/314,199) units to break even on this project (QBE).   2) Dynamic Defenses Corporation’s marketing sales director doesn’t think that the market for the firm’s goods is big enough to sell enough units to make the company’s target operating profit of $25,000,000. In fact, she believes that the firm will be able to sell only about 200,000 units. However, she also thinks the demand for Dynamic Defenses Corporation’s product is relatively inelastic, so the firm can increase the sale price. Assuming that the firm can sell 200,000 units, what price must it set to meet the CFO’s EBIT goal of $25,000,000?   a $195.75 per unit b $225.11 per unit c $205.54 per unit d $244.69 per unit   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. 3)   Increase Decrease No Change The variable cost per unit decreases.         The firm depreciates its fixed assets more quickly over a shorter life.         The amount of debt increases, causing the firm’s total interest expense to increase.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
icon
Related questions
icon
Concept explainers
Question

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 Dynamic Defenses Corporation:
Dynamic Defenses Corporation is considering a project that will have fixed costs of $12,000,000. The product will be sold for $32.50 per unit, and will incur a variable cost of $10.75 per unit.
 
1) Given Dynamic Defenses’s cost structure, it will have to sell (551,724/330,769/116,012/314,199) units to break even on this project (QBE).
 
2) Dynamic Defenses Corporation’s marketing sales director doesn’t think that the market for the firm’s goods is big enough to sell enough units to make the company’s target operating profit of $25,000,000. In fact, she believes that the firm will be able to sell only about 200,000 units. However, she also thinks the demand for Dynamic Defenses Corporation’s product is relatively inelastic, so the firm can increase the sale price. Assuming that the firm can sell 200,000 units, what price must it set to meet the CFO’s EBIT goal of $25,000,000?
 
a $195.75 per unit
b $225.11 per unit
c $205.54 per unit
d $244.69 per unit
 
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.
3)
 
Increase
Decrease
No Change
The variable cost per unit decreases.
 
 
 
 
The firm depreciates its fixed assets more quickly over a shorter life.
 
 
 
 
The amount of debt increases, causing the firm’s total interest expense to increase.
 
 
 
 
 
4)When a large percentage of a firm’s costs are fixed, the firm is said to have a (low/high) degree of operating leverage.
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 3 steps

Blurred answer
Knowledge Booster
Cost volume profit (CVP) analysis
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
Accounting
ISBN:
9781259964947
Author:
Libby
Publisher:
MCG
Accounting
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education