Question

BREAK-EVEN ANALYSIS

The Warren Watch Company sells watches for $24, fixed costs are $185,000, and variable costs are $13 per watch.

1. What is the firm's gain or loss at sales of 10,000 watches? Enter loss (if any) as negative value. Round your answer to the nearest cent.
   $________?
   
   What is the firm's gain or loss at sales of 20,000 watches? Enter loss (if any) as negative value. Round your answer to the nearest cent.
   $________?
2. 
   
3. What is the break-even point (unit sales)? Round your answer to the nearest whole number.
   =_______ units
4. What would happen to the break-even point if the selling price was raised to $34?
   *The result is that break-even point remains unchanged
   OR
   *The result is that the break-even point is lower
   OR
   *The result is that the break-even is higher.
5. What would happen to the break-even point if the selling price was raised to $34 but variable costs rose to $21 a unit? Round your answer to the nearest whole number.
   *The result is that the break-even point is higher.
   OR
   *The result is that the break-even point increases.
   OR
   *The result is that the break- even point decreases.
   

Answer 1

Ans : Contribution per unit = Selling price per unit - variable cost per unit

= $ 24 - $ 13

= $ 11

a. When 10,000 watches are sold,

Profit / (loss) = Watches sold * Contribution per unit - Fixed cost

= 10000 * 11 - 185000

= $ 110,000 - $ 185,000

Loss = (75,000)

b. when 20,000 watches are sold,

Profit / (loss) = Watches sold * Contribution per unit - Fixed cost

= 20,000 * 11 - 185000

= $ 220,000 - $ 185,000

= $ 35,000

c. Break even point in sales = Fixed cost / contribution per unit

= $ 185,000 / 11

= 16,818 units

d. If the selling price is changed to 34, Contribution per unit = Selling price per unit - variable cost per unit

= $ 34 - $ 13

= $ 21

Break even point = Fixed cost / Contribution per unit

= $ 185,000 / 21

= 8809

The result is that the break even point is lower.

e. when selling price is $ 34 and variable cost is $ 21 then contribution per unit = $ 34 - $ 21

= $ 13 per unit

Break even point = Fixed cost / contribution per unit

= $ 185,000 / $ 13

= 14230 units

The result is that the break even point is lower compared when selling price is 24 and variable cost is 13

The result is that the break even point is higher when compared to selling price is 34 and variable cost is 13