Calculate the breakeven sales level

Reference no: EM132667862

Questions -

Q1. A leather goods retailer has been buying a popular style of handbag for $12 per bag and selling them for $20 per bag. The retailer has been selling 200 handbags per month. The 5 - 22 retailer has been close to bankruptcy for the past year. In response to this threat, the retailer's buyer has decided to use an overseas source for this handbag. The new source results in the cost per handbag decreasing to $10 per bag, and the new shipments will begin arriving on January 1. The shop's owner wonders if the arrival of the new versions of the popular handbag might present a good occasion to carry out a $2 price increase.

(a) What is the change in the retailer's variable costs that will occur on January 1? Is this change independent of the price change that the shop's owner is considering or is it tied to this prospective price change? Explain.

(b) Calculate the breakeven sales level for the price increase that the shop's owner is considering, and justify your answer.

Q2. A pharmaceutical company has been selling the prescription allergy drug Aquanox to retail pharmacists at a price of $3.20 per tablet, considerably above the company's variable costs of $0.52 per tablet. The company's director of marketing has recently suggested that they consider lowering the price, but the VP of the division rejected this idea. The VP's explanation was that they should not even consider lowering the price until the drug's high research and development costs have been recovered. Do you agree with the VP's reasoning? Why, or why not?

Q3. One year ago, a manufacturer paid $3,000 for a stamping press that can produce only a particular plastic specialty product. The press now has a market value of $2,500 and is expected to continue to lose $500 of its market value each year. If the press were sold, assume that the manufacturer would earn 5 percent annual interest on the proceeds of the sale. The manufacturer is now considering changing this plastic specialty product's price for the coming year. If the manufacturer's pricing decision will affect whether or not this stamping press is retained by the company, what dollar cost associated with the stamping press is relevant to this decision? Explain your answer.

Reference no: EM132667862

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