Prices are going up Rather than just increase the price tag

Prices are going up. Rather than just increase the price tag on the present product. \"Dooper cleaner\", the plan is to put the same product in a new box and call it \"Super Dooper Cleaner\". The new container will be introdcued by an extravagant publicity program. Current sales are 1,000,000 boxes a year at $1 per box. Fixed costs are $300,000 and variable costs are 0.60 per unit. It is anticipated that neither sales volume nor variable costs will increase, but the publicity campagin will double fixed costs.

A. If the new price is $1.29 per box, what is the next break-even point?

B. How many boxes above present sales would have to sold under the \"old product plus persuasion\" plan to double the present profit?

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Solution

Solution :

A) Contribution = Selling price - variable cost

Contribution = $ 1.29 - $ 0.60

Contribution = $ 0.69

Break even point in output = Fixed cost / Contribution per unit

fixed cost is doubled with the new publicity campaign

fixed cost = $ 600,000

Break even point in output = $ 600,000 / 0.69

Break even point in output = 869,565 units approximately

b) The break even point as per the old campaign = $ 300,000 / 0.40

The break even point as per the old campaign = 750,000 units

The break even point as per the old campaign plus persuasion = 869,565

The number of boxes above present sales = 869,565 - 750,000

The number of boxes above present sales = 119,565 units .