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ABC corporation has existing property and equipment that is not in use. The company is considering...

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Finance

ABC corporation has existing property and equipment thatis not in use. The company is considering the use of this propertyand equipment. One option is to use the property and equipment toproduce a new product. Estimates for demand of this product are30,000 units annually for the first 5 years and 20,000 unitsannually for the following 6 years. Beyond that, the product isconsidered to be obsolete and production will cease. Price andvariable costs would be $100 and $65, respectively. Fixed costswould be $225,000 per year.

What is the Break-even price?

Answer & Explanation Solved by verified expert
4.4 Ratings (938 Votes)

Below is the table

Assuming since 30000 units can be sold for 1st 5 years below table states that if 2000 units were produced and increased year on year, by 6th year if used to full capacity break-even will happen

Years Units Sales Variable cost Fixed cost Total cost Profit/loss
1 2000            200,000 130000 225000 355000 (155,000)
2 3000            300,000 195000 225000 420000 (120,000)
3 4000            400,000 260000 225000 485000     (85,000)
4 5000            500,000 325000 225000 550000     (50,000)
5 6000            600,000 390000 225000 615000     (15,000)
6 20000         2,000,000 1300000 225000 1525000    475,000

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Transcribed Image Text

ABC corporation has existing property and equipment thatis not in use. The company is considering the use of this propertyand equipment. One option is to use the property and equipment toproduce a new product. Estimates for demand of this product are30,000 units annually for the first 5 years and 20,000 unitsannually for the following 6 years. Beyond that, the product isconsidered to be obsolete and production will cease. Price andvariable costs would be $100 and $65, respectively. Fixed costswould be $225,000 per year.What is the Break-even price?

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