Answer:
Initial cost of setting up the manufacturing infrastructure = $2,000,000
Variable manufacturing cost per tile = $4
Selling price(revenue) per tile sold = $8
Company can earn contribution of = Selling price (revenue) per tile sold - Variable manufacturing cost per tile = $8 - $4 = $4 per tile sold
Break Even point (in units) = Fixed cost / Contribution per unit of tile = $2000000/$4 = 500,000 tiles
a. The company must sell 500,000 tiles in the first six months in order to break even
b. The company should not invest in this venture as it would not even be able to cover the total cost of investment. Reason is the break-even number of tiles to be sold is more than the forecasted sales units by 100,000 (500,000 - 400,000)
Also, company would incur a loss the first six months:
= Number of tiles*Revenue per tile - Fixed Cost - Number of tiles * Variable cost per tile
= 400000*$8 - $2000000 - 400000*$4
= $3200000 - $2000000 - $1600000
= ($400,000) loss.
