Product at the Jennings Company enjoyed reasonable sales volumes, but its contributions to profits were disap- pointing. Last year, 17,500 units were produced and sold. The selling price is $22 per unit, the variable cost is $18 per unit, and the fixed cost is $80,000.
a. What is the break-even quantity for this product? Use both graphic and algebraic approaches to get your answer.
b. If sales were not expected to increase, by how much would Jennings have to reduce their variable cost to break even?
c. Jennings believes that a $1 reduction in price will in- crease sales by 50 percent. Is this enough for Jennings to break even? If not, by how much would sales have to increase?
d. Jennings is considering ways to either stimulate sales volume or decrease variable cost. Management be- lieves that either sales can be increased by 30 percent or that variable cost can be reduced to 85 percent of its current level. Which alternative leads to higher contributions to profits, assuming that each is equally costly to implement? (Hint: Calculate profits for both alternatives and identify the one having the greatest profits.)
e. What is the percent change in the per-unit profit contribution generated by each alternative in part (d)?