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Ch3_-_CD_Solutions (1)

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

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