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A regional soft drink manufacturer is considering opening a new manufacturing plant in the Midwest. Its total fixed costs are $100 million, with the cost of the new plant included in that figure at a depreciated value based on the expected life of the facility. It plans to sell soft drinks through its distributors to its existing retail accounts. A review of consumer advertising shows that $13.99 is a common price for a 24-pack of 12-oz cans of soda at the local big box stores. Retailer margins in the industry are estimated to be approximately 30% based on the retail selling price. The manufacturing variable costs of the soda are estimated to be $0.28 per can.
[a] Calculate the break-even volume.
[b] What would happen to the break-even point if the fixed costs could be reduced by 35% annually?
[c] What would happen if the variable costs decreased to $0.24 based on declines in commodity costs?
[d] Finally, what would the break-even be if the firm wanted to make a $20 million profit?
[e] Comment on the managerial significance of these numbers, based on your understanding of the break-even concept.
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