Breakeven Analysis
(Breakeven Analysis, Optimal Pricing with Capacity Constraints) Greentown Industries sells its transport services at a range of prices to five different customer groups. The company has fixed costs of $150,000 per year. The average variable costs for each transport service, irrespective of customer group, are $7 per service. The table below shows the prices charged to each customer group and the quantity of transport services that are currently sold at that price.
|
Customer Group
|
Selling Price
|
Quantity
|
|
Multinational
|
$19
|
13,000
|
|
Corporate
|
$20
|
12,500
|
|
Small business
|
$21
|
12,000
|
|
Government
|
$22
|
11,000
|
|
Private
|
$23
|
10,000
|
1. If the average selling price is $21, calculate the breakeven point in dollars and volume, and draw a rough sketch of a cost-volume-profit (CVP) graph that shows the relationships between the elements of CVP.
2. Ignoring any market demand or capacity limitations, calculate the optimum selling price for Greentown Industries, and identify which customer group is most profitable.
3. Assume that the maximum market demand for each customer group is 20,000 transport services at the same price as currently charged (see the table above). Also assume that Green-town's capacity limitation is 60,000 transport services. Based on the calculation of optimum selling prices in (b) above but with the capacity and demand assumptions taken into consideration, calculate the maximum profit that Greentown can earn and the customer mix and quantity by which that profit can be achieved.