Chewbacca wants to know what he can afford to spend on fixed costs for his deluxe single serve snacks specially formulated for Wookies. 

• He expects to sell his luxury Wookie snacks to the retail trade across the Republic for $12 per bag.
• He estimates that he can easily sell 40,000 units per year
• Product cost (through a contract manufacturer) is $5.50 per unit
• His "other" direct variable costs are $1.50 per unit
  How much (in dollars) can Chewy afford to spend on fixed costs and still break-even?

Question 2.1

Owen Lars operates a business that sells enhanced condensers to the water farmers on Tatooine. 

• He buys basic condensers from his supplier on Cloud City for $400 per condenser and sells them for $750 each after he has modified them to perform in the scorching heat of Tatooine.
• He pays $20,000 per month to rent his production facility and $2,800 per month for utilities.
• The work on modifying the condensers is done by a team of droids.  He incurs monthly operating expenses of $4,500 per month to keep the droids functioning properly.

How many condenser units does Owen have to sell each year to break-even?

 

Question 2.2

If Owen Lars wanted to make $100,100 per year in profit, how many additional condenser units would he have to sell each year?

 

Question 2.3

If Owen Lars retains his profit target from Part II, but he is able to negotiate a better wholesale price from his supplier (now $370.00 per unit), what would be his new breakeven point (in units)?

 

Question 3.1

Luke's Lightsabre Inc. is a new business that is looking to sell custom crafted light sabres.

• Luke believes that he can sell the light sabres for $1,000 each
• His market research has told him that there is annual demand of 5,000 light sabres for the market in total
• Luke projects that his "Force-enabled" light sabres will achieve a 50% market share
• Luke expects his total direct costs from producing each light sabre will be $200.

What is Luke's expected total Gross Margins (in dollars)?

 

Question 3.2

Luke's Light Sabre Inc. is expecting to have total fixed costs of $1,500,000 per year

 What is Luke's expected fixed costs per unit (in $)?

 

Question 3.3

Based on your results from 3.1 and 3.2, what is Luke's expected Breakeven point (in units)?

 

Question 3.4
If Luke's fixed operating costs were to increase by $500,000, what would be his new breakeven point (in units)?

 

Question 4.1

The Brain wants you to evaluate a new toy that he has developed called the "Noodle-Noggin Doll" which is a miniature version of the Brain which has the power to hypnotize people so that he can finally achieve his goal to take over the world. 

• Fixed costs are $2.25 million
• The direct (variable) manufacturing cost is $8.00 per unit
• There are "other" direct (variable) costs of 10% of sales
• The product's selling price is $20.00

What are the total sales dollars required to break-even?

 

Question 4.2

The Brain is contemplating some upgrades and additional features for the Noodle Noggin Doll as described in Question 4.1.  

 Additional features would add complexity (and expense) to the direct manufacturing costs, which would increase by 50%.

The additional features would justify a sales price increase of 20%.

How many unit sales would now be required to break-even?
 

Question 5

The brain is seeking your advice as to which option of the options below he should choose? Briefly explain your answer, citing specific metrics to support your answer (2 sentences max).

Option 1 - Carry on with his product as-is as decribed in Question 4.1 or

Option 2 - Approve the upgrades as described in Question 4.2

If you choose option 1, the expected unit sales in the upcoming year are 230,000 units.

If you choose option 2, the expected unit sales in the upcoming year are 260,000 units.

Answer rating: 100% (QA)

The questions seem to be complete and clear Lets go through them one by one Question 1 The breakeven point in dollars is when total revenue equals the total costs Variable Fixed costs First we need to ... View the full answer