Break-Even Analysis; Pricing [LO1, LO4, LO5]
Whitney Sewing and Alterations has just introduced a new line of alteration services for men's suits for which the company is trying to determine an optimal selling price. Marketing studies suggest that the company can increase sales by 2,000 units for each $2 per unit reduction in the selling price. The company's current selling price is $45 per unit, and variable expenses are $27 per unit. Fixed expenses are $111,600 per year. The current annual sales volume (at the $45 selling price) is 6,000 units.
Required:
1. What is the current yearly operating income or loss?
2. What is the current break-even point in units and in dollar sales?
3. Assuming that the marketing studies are correct, what is the maximum profit that the company can earn yearly? At how many units and at what selling price per unit would the company generate this profit?
4. What would be the break-even point in units and in dollar sales using the selling price you determined in (3) above (i.e., the selling price at the level of maximum profits)? Why is this break-even point different from the break-even point you computed in (2) above?