"Chapter 5Problems1. Gateway Appliance toasters sell for $20 per unit, and the variable cost to produce themis $15. Gateway estimates that the fixed costs are $80,000. a. Compute the break-even point in units. b. Fill in the table below (in dollars) to illustrate the break-even point has been achieved.Sales ............................... ____________– Fixed costs ................... ____________– Total variable costs ..... ____________Net profit (loss) .............. ____________5-1. Solution:Gateway ApplianceFixed costs a. BE =Pr ice-variable cost per unit $80,000 $80,000 = = = 16,000 units$20 - $15 $5 b. Sales $320,000 (16,000 units × $20)–Fixed costs $80,000–Total variable costs 240,000 (16,000 units × $15)Net profit (loss) $ 0S5-3 2. Hazardous Toys Company produces boomerangs that sell for $8 each and have a variablecost of $7.50. Fixed costs are $15,000. a. Compute the break-even point in units. b. Find the sales (in units) needed to earn a profit of $25,000.5-2. Solution:The Hazardous Toys Company$15,000 BE = = 30,000 unitsa.$8.00 - $7.50 Profit+ FC $25,000+ $15,000 b.Q = = (P- VC)$8.00- $7.50 $40,000 = = 80,000 units $.50 S5-4 3. Ensco Lighting Company has fixed costs of $100,000, sells its units for $28, and hasvariable costs of $15.50 per unit. a. Compute the break-even point. b. Ms. Watts comes up with a new plan to cut fixed costs to $75,000. However, morelabor will now be required, which will increase variable costs per unit to $17. Thesales price will remain at $28. What is the new break-even point? c. Under the new plan, what is likely to happen to profitability at very high volumelevels (compared to the old plan)?5-3. Solution:Ensco Lighting CompanyFixed costs a. BE = Price - variable cost per unit $100,000 $100,000 = = = 8,000 units $28 - $15.50 $12.50 Fixed costs b. BE = Price - variable cost per unit $75,000 $75,000 = = = 6,818 units $28 - $17 $11 The breakeven level decreases.c. With less operating leverage and a smaller contributionmargin, profitability is likely to be less at very high volumelevels.S5-5 4. Air Filter, Inc., sells its products for $6 per unit. It has the following costs:Rent .................................$100,000Factory labor ...................$1.20 per unitExecutive salaries under contract ............................$89,000Raw material ...................$.60 per unitSeparate the expenses between fixed and variable cost per unit. Using this informationand the sales price per unit of $6, compute the break-even point.5-4. Solution:Air Filter, Inc. Variable CostsFixed Costs (per unit)Rent $100,000 Factory labor$1.20Executive salariesunder contract $89,000Raw materials.60 $189,000 $1.80FC $189,000 $189,000 BE = = = = 45,000 unitsP-- VC $6.00 $1.80 $4.20 S5-6 5. Eaton Tool Company has fixed costs of $200,000, sells its units for $56, and has variablecosts of $31 per unit. a. Compute the break-even point. b. Ms. Eaton comes up with a new plan to cut fixed costs to $150,000. However, morelabor will now be required, which will increase variable costs per unit to $34.The sales price will remain at $56. What is the new break-even point? c. Under the new plan, what is likely to happen to profitability at very high volumelevels (compared to the old plan)?5-5. Solution:Eaton Tool CompanyFixed costs a.BE = Price - variable cost per unit $200,000 $200,000 = = = 8,000 units $56 - $31 $25 Fixed costs BE = b.Price - variable cost per unit $150,000 $150,000 = = = 6,818 units $56 - $34 $22 The breakeven level decreases.c. With less operating leverage and a smaller contributionmargin, profitability is likely to be less than it would havebeen at very high volume levels.S5-7 "