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.)
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