Antonio and his friend, Giancarlo, are both talented painters. Last year they began painting original artistic postcards, which they gave to their friends as holiday gifts. In addition, they began selling these at a crafts fair and sold them mainly for fun. At the last fair, a buyer who really liked the postcards offered them a contract to paint 500 postcards of a specific design for €2,000. With the increase in demand, Antonio and Giancarlo decide to open a business, calling it A&G. They priced each postcard at €4.00 each. Variable operating costs amounted to an average of €1.50 per postcard. To produce the postcards for the contract, they have to buy a specific machine to cut the postcards, which will cost them €700.

a. Calculate A&G’s operating breakeven point.

b. Calculate A&G’s EBIT on the contract.

c. If Antonio decides to renegotiate the contract at a price of €5.00 per postcard, what will the EBIT be?

d. If the buyer refuses to pay more than €4.00 per postcard, but is willing to negotiate quantity, what quantity of postcards will result in an EBIT of €1,200?

e. At this time, A&G’s postcards come in 20 different varieties. While the average variable cost per postcard is €1.50, the actual cost varies from unit to unit. What recommendation would you give to Antonio and Giancarlo with regard to pricing and the numbers and types of units that they offer for sale?