Question

Dynamic Defenses Corporation is considering a project that will have fixed costs of $10,000,000. The product will be sold for $41.50 per unit, and will incur a variable cost of $10.75 per unit. Therefore, Defencse Dynamics has to sell (314,199, 551,724, 330,770, or 116,012) units to break even on this project.
Defense Dynamics marketing and sales director doesn't think that the firm's market is big enough for the firm to break even. In fact, she beleives that the firm will be able to sell only about 200,000 units. However, she also thinks that the demand for Defense Dynamics product is realatively inelastic, so the firm can increase the sales price. Assuming that the firm can sell 200,000 units, what price must it set to break even?

a. $77.83
b. $70.75
c. $67.21
d. $84.90

Answer 1

Answer:

1. Defencse Dynamics has to sell 325,203 units units to break even on this project.

2. Assuming that the firm can sell 200,000 units, Price it must set to break even is $60.75

Explanation:

The break-even point is the level of production at which the costs of production equal the revenues for a product and calculated by using following formula:

Break-even point in units = Fixed cost/(Selling price per unit-Variable cost per unit) = $10,000,000/( $41.50 - $10.75) = 325,203 units

The firm can sell 200,000 units.

Price it must set to break even = (Fixed cost/Break-even point in units) + Variable cost per unit = ($10,000,000/200,000) + $10.75 = $60.75