Question

15. Preliminary plans are underway for construction of a new stadium for a major league base ball team. City officials question the number and profitability of the luxury corporate boxes planned for the upper deck of the stadium. Corporations and selected individuals may purchase a box for $300,000. The fixed construction cost for the upper-deck area is estimated to be $4,500,000, with a variable cost of $150,000 for each box constructed. a. What is the breakeven point for the number of luxury boxes in the new stadium? b. Preliminary drawings for the stadium show that space is available for the construction of up to 50 luxury boxes. Promoters indicate that buyers are available and that all 50 could be sold if constructed. What is your recommendation concerning the construction of luxury boxes? What profit is anticipated?

Answer 1

Answer:

Ans.

a) The breakeven point for the number of luxury boxes in the new stadium is 30 units ($9,000,000 in sales)

b) My recomendation is to sell at 300k until the break even point is reached and after that you should consider incrementing the unit´s price.

c) If the price and the costs remain as they are, the profit would be  $3,000,000 with sales of $15,000,000.

Step-by-step explanation:

Hi, first let me show you what is the equation that we have to use in order to find the break even point (in units) or BEP.

$BEP=\frac{Fixed Costs}{(Price-VarCost)} =\frac{4,500,000}{(300,000-150,000)} =30$

So the break even point is 30 units, which is the same to say $9,000,000 in sales ($300,000 per unit * 30 Units).

The profit that you should anticipate, if all remains the  way it is:

$Profit=(Price-VarCost)*Units-FixedCosts$

$Profit=(300,000-150,000)*50-4,500,000=3,000,000$

Best of luck.