Preliminary plans are underway for construction of a new stadium for a major lea
ID: 2646407 • Letter: P
Question
Preliminary plans are underway for construction of a new stadium for a major league baseball team. City officials question the number and profitability of the luxury corporate boxes planned for the upper deck of the stadium. Corporations and selected individuals may purchase a box for $300,000. The fixed construction cost for the upper-deck area is estimated to be $4,500,000, with a variable cost of $150,000 for each box constructed.
a. What is the breakeven point for the number of luxury boxes in the new stadium?
b. Preliminary drawings for the stadium show that space is available for the construction of up to 50 luxury boxes. Promoters indicate that buyers are available and that all 50could be sold if constructed. What is your recommendation concerning the construction of luxury boxes? What profit is anticipated?
Explanation / Answer
a) Break even units of sales = Fixed Costs/ (Sale/unit -Variable Cost/Unit) = 4,500,000/(300,000 - 150,000) = 30
b) Since 50 seats can be constructed and sold which is more than breakeven units of 30 the construction of luxury boxes should go ahead.
Profit anticipated = 50 * (Sales - Variable Cost) - Fixed cost = 50 * ( 300,000 -150,000) - 4,500,000 =$ 3,000,000