Last year a toy manufacturer introduced a new toy truck that

Last year, a toy manufacturer introduced a new toy truck that was a huge success. The company invested $2.5 million for a plastic injection molding machine (which can be sold for a $2 million) and$100,000 in plastic injection molds specifically for the toy (not valuable to anyone else). Labor and the cost of materials necessary to make each truck is about $3. This year, a competitor has developed a similar toy that has significant reduced demand for the toy truck. Now, the original manufacturer is deciding whether they should continue production of the tor truck. If the estimated demand is 100,000 trucks, what is the breakeven price for the toy truck? Should you shut down?

Solution

Break- even analysis:2,000,000/100,000 = 20 per truck + $3 MC per truck = $23 per truck is the breakeven price per truck

Relevant costs = 2,000,000 (not $2.6 because the $2.5M paid for the injection mold machine andthe $100,000 in molds are sunk costs irrelevant to the discussion as they have already incurred)

Quantity = 100,000

If the company can sell the truck for $23, they should stay open. If they are unable to charge $23 pertruck they should shut down.