Chapter 7, Problem 25E

Rosario Company, which is located in Buenos Aires, Argentina, manufactures a component used in farm machinery. The firm’s fixed costs are 4,000,000 p per year. The variable cost of each component is 2,000 p, and the components are sold for 3,000 p each. The company sold 5,000 components during the prior year. (p denotes the peso, Argentina’s national currency. Several countries use the peso as their monetary unit. On the day this exercise was written, Argentina’s peso was worth .104 U.S. dollar. In the following requirements, ignore income taxes.)

Required: Answer requirements (1) through (4) independently.

1. 1. Compute the break-even point in units.
2. 2. What will the new break-even point be if fixed costs increase by 10 percent?
3. 3. What was the company’s net income for the prior year?
4. 4. The sales manager believes that a reduction in the sales price to 2,500 p will result in orders for 1,200 more components each year. What will the break-even point be if the price is changed?
5. 5. Should the price change discussed in requirement (4) be made?