Break-even Point Schweser Satellites Inc. produces satellite earth stations that
ID: 2631346 • Letter: B
Question
Break-even Point
Schweser Satellites Inc. produces satellite earth stations that sell for $95,000 each. The firm's fixed costs, F, are $1.5 million, 50 earth stations are produced and sold each year, profits total $400,000; and the firm's assets (all equity financed) are $4 million. The firm estimates that it can change its production process, adding $3.5 million to investment and $410,000 to fixed operating costs. This change will (1) reduce variable costs per unit by $12,000 and (2) increase output by 20 units, but (3) the sales price on all units will have to be lowered to $89,000 to permit sales of the additional output. The firm has tax loss carryforwards that render its tax rate zero, its cost of equity is 15%, and it uses no debt.
a. What is the incremental profit? To get a rough idea of the project's profitability, what is the project's expected rate of return for the next year (defined as the incremental profit divided by the investment)? Round your answer to two decimal places.
The incremental profit is % =
b. Would the firm's break-even point increase or decrease if it made the change? By how much? Enter your answer as positive number if it increases or negative number if it decreases.
The break-even point changes by units. =
Explanation / Answer
Solution:
(1) Computation of break-even point:
(a). Break even point in units:
Fixed expenses / Contribution margin per unit
270,000 / 54*
= 5000 units
*$180