Incremental Break-even analysis
PQR manufactures and markets home video equipment. One of the most popular items in the company's product line is a video tape player at $250 each. Sales have been growing rapidly and are expected to reach 4,800 units in the next year if the price remains unchanged. Variable costs are $112.50 per unit.
Despite its projected growth in sales at the current price, PQR is considering a 5% price cut to remain competitive and retain its share in this rapidly growing market. Since the cut would be implemented in the next year, the initial sales level, or baseline is next year's projected sales (4,800 unites).
Production capacity is currently limited to 5,000 units but can be increased by purchasing equipment which costs $15,000 for each additional 1,000 units of capacity.
1). Calculate the total contribution before the price cut and after the price cut assuming total sales volume stays the same (4,800 units).
2). Calculate the breakeven sales (units and percentage) for a 5% price cut assuming there is no change of relevant variable cost.
3). Suppose the variable cost is decreased by $12.5. Given that PQR can manufacture home video equipment at a lower variable cost, the management is considering a 5% price cut. By how many units sales has to change to maintain the same profit.