Part A:
An entrepreneur, Mike Smith, is getting ready to launch a company that offers professionally recorded, five minute videos of Karaoke performances. Mike anticipates the recording equipment to cost $225,000 and the material and labor to come to $16 per unit.
a. If the videos can be sold for $45 each, how many must be sold to break even?
b. What is the breakeven point in dollars?
Part B:
Mike is confident that consumer demand will substantially exceed the break-even point computed above. With that in mind, he is contemplating having a classier (and more expensive) studio that may draw professional musicians, as well. The cost to set up the studio and purchase the equipment would rise to $360,000. However, with the anticipated increase in sales volume, production costs would fall to $11 per CD. The sales price would remain the same.
c. What is the breakeven point for this new process in units and in dollars?
d. Compare this process to the process proposed above. At what volume of demand should Mike choose the classier studio? Calculate the point of indifference, and describe it in words.