Detmer Holdings AG of Zurich, Switzerland, has just introduced a new fashion watch for which the company is trying to find an optimal selling price. Marketing studies suggest that the company can increase sales by 5,000 units for each $2 per unit reduction in the selling price. The company’s present selling price is $90 per unit, and variable expenses are $60 per unit. Fixed expenses are $840,000 per year. The present annual sales volume (at the $90 selling price) is 25,000 units.
1. What is the present yearly net income or loss (before taxes)?
2. What is the present break-even point in units and in dollars?
3. Assuming that the marketing studies are correct, what is the maximum profit (before taxes) that the company can earn yearly? At how many units and at what selling price per unit would the company generate this profit?
4. What would be the break-even point in units and in dollar sales using the selling price you determined in (3) above (e.g., the selling price at the level of maximum profits)? Why is this break-even point different from the break-even point you computed in (2) above?
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