The formulas for breakeven analysis are:

Profit = (sales price/unit)*(units sold) - (variable cost/unit)*(units sold) - (fixed cost)

Breakeven volume = (fixed cost )/(sales price/unit - variable cost/unit)

Consider the following data projected for the year:

• Selling price/unit: $15
• Variable Cost/unit: $8 (this was for labor, materials, and overhead required to produce each unit sold)
• Fixed Costs: $500,000/year (rent, insurance, fixed indirect labor, and other costs that do not depend on volume)
• Projected sales volume: 80,000 units (sales based on previous year sales)
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a) Calculate the breakeven volume using the data above.

Now consider each of the following situations. Calculate thenew B/E volumeand thenew profitat the projected volume for each one. Questions

b, c, & d all assume the original projected data as the starting point.

b) Suppose you are able to reduce the fixed cost by $10,000 by using a new factory layout that reduces the need for leased building space?

c) Suppose you were able to reduce the variable cost/unit by $0.50 by using less expensive material and another $0.50 by reducing labor costs?

d) Suppose you are able to raise the selling price by $2.00/unit because your product was top-rated on Amazon and in the latest issue of Consumer Reports due to superior quality, reliability, and desirable features.

e)Suppose b, c, & d all happened at once. Does yourincrease inprofitin e) equal thesum of the increases in profitfrom your answers to parts b, c, & d?

Now, suppose the Plant Manager has put together a profit improvement team to increase profit by $30000/year. You are on the team and you are considering various strategies. Strategy 1 is to reduce fixed cost $30,000 by eliminating an indirect labor position.

f) Strategy 2 is to reduce labor or material used for each unit. How much would you have to reduce the cost of labor and/or material per unit to achieve the target profit?

g) Strategy 3 is to increase the price and hope that sales do not drop. What would be the new product price assuming sales volume remains the same?

h) Strategy 4 is to have a 10% off sale and hope that increased volume will generate the desired profit. What would the new volume have to be to generate the desired profit?