Washburn Guitars: Using Break Even Points to Make Pricing Decisions

Washburn Guitar manufactures instruments in four categoriesone-of-a-kind, batch custom, mass customized, and mass producedand must set prices in each category that enable it to stay in business. Bill Abel, Washburns VP of sales, is responsible for setting the prices for the firms guitar lines. Looking at a new line whose suggested retail price is $349, Abel estimates elements of Washburns fixed and variable costs to project the likely break-even point and profit. You should calculate break-even points and profits under various conditions and assess the effects of moving two production facilities to a single new location.

To do this, you must first understand how to calculate the following:

Key terms and equations defined and explained in Chapter 13: Price (P), Total Revenue (TR), Total Cost (TC), Fixed Costs (FC), Variable Costs (VC), Unit Variable Costs (UVC), and Break-Even Point (BEP). Also, ask the following questions:

How do you compute Unit Variable Cost (UVC)?

How do you compute total cost (TC)?

What is a break-even point? How do you calculate it?

What is the profit equation?

Once you understand these cost equations, compute the break-even point for the new line of guitars if the retail price is (a) $349; (b) $389; and (c) $309. Also, (d) if Washburn achieves the sales target of 2,000 units at the $349 retail price, what will its profit be?

Assume that the merger with Parker leads to the cost reductions projected in the case. Show the (a) new break-even point at a $349 retail price for this line of guitars and (b) new profit if it sells 2,000 units.