Preliminary plans are under way for the construction of a new stadium for a majo
ID: 396527 • Letter: P
Question
Preliminary plans are under way for the construction of a new stadium for a major league baseball team. City officials have questioned the number and profitability of the luxury cor- porate boxes planned for the upper deck of the stadium. Corporations and selected individu- als may buy the boxes for $300,000 each. 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. 15. 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 50 could be sold if constructed. What is your recommendation concerning the construc- tion of luxury boxes? What profit is anticipated?Explanation / Answer
Answer to question a :
Let Breakeven point = N units
At break even point ,
Total revenue = Total cost
Or, Total revenue = Fixed cost + Variable cost / unit x Number of units
Or, Price/ unit x Number of unit = Fixed cost + Variable cost / unit x Number of units
Or, Number of units ( N ) = Fixed cost / ( Price/ unit – Variable cost / unit )
Therefore, Breakeven point
= $4,500,00/ ( $300,000 - $150,000)
= $4,500,000/ $150,000
= 30 units
BREAKEVEN POINT FOR NUMBER OF LUXURY BOXES IN THE NEW STATDIUM = 30 UNITS
Answer to question b :
Profit = Total revenue – Total cost
= ( Price/ unit – Variable cost / unit ) x Number of units – Fixed cost
Anticipated profit for 50 luxury boxes
= ( $300,000 - $150,000) x 50 - $4,500,000
= $150,000 x 50 - $4,500,000
=$7,500,000 - $4,500,000
= $3,000,000
Since it would profit , it is recommended to construct 50 luxury boxes
BREAKEVEN POINT FOR NUMBER OF LUXURY BOXES IN THE NEW STATDIUM = 30 UNITS