Miniature Molding is planning to introduce a valve for use in medical implants. Variable costs per unit are $250. The maximum price MM could charge is $325. Fixed costs associated with this product are $20,000,000. Depreciation expense of $2,500,000 are included in fixed costs. The worst case forecast calls for sales of 240,000 valves, the best case for $290,400. Will MM reach cash breakminuseven in the worst case scenario?

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Dryomys Dryomys · Answer 1 · 2020-02-03T06:35:36+01:00

Answer:

$8,666,775

Explanation:

Given that,

Variable costs per unit = $250

Maximum price MM could charge = $325

Fixed costs = $20,000,000

Depreciation expense = $2,500,000

Worst case sales unit = 240,000

Let the break even be x,

Total cost at break even:

= Fixed costs + (Variable costs per unit × No. of units)

= $20,000,000 + 250x

Total Revenue at break even:

= Sales price × No. of units at break even

= 325x

Revenue = Cost at break even

325x = 250x + $20,000,000

325x - 250x = $20,000,000

75x = $20,000,000

x = $20,000,000 ÷ 75

= 266666.67 or 266,667

Since break even unit is more than worst case sales unit the sales will fall short by:

= Break even units - Worst case sales unit

= 266,667 - 240,000

=26,667 units i.e by

= 26,667 × $325

= $8,666,775