A manufacturer of medium sized aircraft is considering building a larger aircraft.  Currently the market for large aircraft is a duopoly of Boeing and Airbus.

 

It takes a long time to design an aircraft, an the first units to be produced/sold will be in Year 5.

 

Costs for the new aircraft are expected to be:

 

Item	Amount	Notes
Research and Development	$1 billion each year for years 1 to 4	This amount is capitalized, and amortized per aircraft
Fixed Production Costs	$2 billion	This is the cost of the new plant and equipment,   This will be straight line depreciated over the life of production.
Variable Production Costs	$50 million per aircraft
Fixed Selling Costs	$20 million per year, starting in year 4
Variable selling costs	$5 million per aircraft in years 5 and 6, $2 million per aircraft in later years

 

Often, no airline wants to be the sole operator of an aircraft (because of lack of industry ability to provide service to a unique aircraft).  For this reason, the first 20 aircraft will sold at the Variable Manufacturing costs in order to entice an airline to purchase this new type of aircraft. After this initial sale, aircraft will be sold for $100 million each.

 

It is estimated that 100 units will be built and sold each year.  To makes things easy, assume that there are no inventories.

 

What is the break-even point in terms of units sold? When will the break-even point occur? 

Answer rating: 100% (QA)

The breakeven point is the number of units sold at which the total revenue equals the total cost The ... View the full answer