Currently a business sells 20,000 units at a selling price of $40. Total Fixed Costs are $500,000 which includes $80,000 (or 10% of sales $) in marketing costs. Total Variable Costs are $100,000at output of 20,000 units. The business is looking to double their sales volumes to 40,000 units. A financial analysis will allow you to recommend whether they should drop their price to $35.00 or increase their advertising spend to 10% of sales in order to achieve their sales volume goals. 

Create pro-forma income statements and breakeven analysis for the options described above and answer these questions:

1. a.	What is the current variable cost per unit based on total variable costs of $100,000 at20,000 units?
   b.	What is breakeven in units, based on current sales of 20,000 units at selling price of $40 and total fixed costs of $500,000 and total variable costs of $100,000.
   c.	What will happen to breakeven if sales increase to 40,000 units, but price reduced to $35 andfixed costs remain unchanged
   d.	What happen to break even if sales increase to 40,000, price remains unchanged at$40 and fixed costs increase because total marketing costs increased to 10% of sales.
   e.	As units sold increase, what will happen to unit costs?
   f.	As units sold increase, what will happen to fixed costs?
   g.	As units sold increase, what will happen to Total Variable Costs?
   h.	What observations do you make about the relationship between price, gross margin, breakeven and net profit?
   i.	What observations to you make about relationship between sales volumes, variable costs and breakeven?
   j.	What observations to you make about relationship between fixed costs and volumes?
   k.	Is it better to sell product at $35 (nochange in fixed costs) or$40 (and increase marketing to 10% of $sales)? Explain your answer.

Answer rating: 100% (QA)

a Current variable cost per unit Total variable costs Units produced 100000 20000 units 5 per unit b ... View the full answer