Ch3_-_CD_Solutions (1) - MGTB03 Chapter 3 Solutions to...

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MGTB03 Chapter 3 – Solutions to Class Discussion Questions 3.28 Breakeven, Operating Leverage, Cost Function Decision - Junior Achievement Group A. Breakeven for option 1 : $5,600/($20 – $6) = 400 sets Breakeven for option 2: New variable cost = 0.10*$20 = $2 $3,800/($20 - $6 - $2) = 317 sets Breakeven for option 3: There are no fixed costs, so the breakeven point = 0 sets ; if no units are sold, no fee is paid. B. The cost function for option 1 has the highest proportion of fixed cost, so it has the highest operating leverage. C . Lowest operating risk is option 3 because no fees are paid unless there are sales. D. To find the indifference point, the two cost equations are set equal to each other as follows: $5,600 = $3,800 + 10%TR $1,800 = 10%TR TR = $18,000 When total revenues are below $18,000, option 2 is more profitable. Above $18,000, option 1 is more profitable. E . Option 1 profit = ($20-$6)*1,000 - $5,600 = $8,400 Option 2 profit = ($20-$6-$2)*1,000 - $3,800 = $8,200 Option 3 profit = ($20-$6-($20*0.15))*1,000= $11,000 The highest profit at sales of 1,000 sets is $11,000 for option 3, so this is probably the best choice. (This answer ignores possible other factors that might influence the decision.) 1
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3.32 Breakeven, Target Profit, Margin of Safety - Vines and Daughter A. Estimated sales in number of swimsuits = $2,000,000/$40 = 50,000 swimsuits
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This note was uploaded on 10/09/2011 for the course MANAGEMENT MGTB03H3 taught by Professor Liangchen during the Summer '09 term at University of Toronto- Toronto.

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Ch3_-_CD_Solutions (1) - MGTB03 Chapter 3 Solutions to...

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