Problem 6 The Death Star Business is considering the manufacture of a newtype of

Question

Problem 6

The Death Star Business is considering the manufacture of a newtype of tennis ball. Each tennis ball would sell for $3.75 andwould require $1.75 in variable costs. In addition, annualfixed costs associated with the project would total$64,000.

Part a

Calculate the break even point in units

Part b

Calculate the break even point in sales dollars.

Part c

Calculate the operating income or loss at a sales volume of30,000 tennis balls.

Part d

Calculate the number of tennis balls that must be sold to earn aprofit of $80,000.

Explanation / Answer

Part a BEP =        Fixedcosts            Contribution margin        =     64,000            3.75 - 1.75         = 32,000 units Part b BEP in sales dollars      Fixedcosts                                         contribution margin ratio =3.75-1.75      = .0534      Contribution marginratio                                                                 3.75 64,000 0.534 =$119,850 part c Income or loss at 30,000 tennis balls sales 30,000*3.75 = 112,500 -VC 30,000*1.75       52,500 -FC                         64,000 Loss                        (4,000) Partd Number of tennis balls to be sold to earn a profit of $80,000 Fixed cost + profit CM / unit =64,000 + 80,000            2 =72,000 tennis balls

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