Preliminary plans are underway for construction of a new sta

Preliminary plans are underway for construction of a new stadium for a major league baseball team. City officials question the number and profitability of the luxury corporate boxes planned for the upper deck of the stadium. Corporations and selected individuals may purchase a box for $300,000. The fixed construction cost for the upper-deck area is estimated to be $4,500,000, with a variable cost of $150.000 for each box constructed. a. What is the breakeven point for the number of luxury boxes in the new stadium? b. Preliminary drawings for the stadium show that space is available for the construction of up to 50 luxury boxes. Promoters indicate that buyers are available and that all 50 could be sold if constructed. What is your recommendation concerning the construc- tion of luxury boxes? What profit is anticipated?

Solution

a. Break even Point is that point of sales at which there is no profit and no loss

i.e. Fixed Cost= Total Contibution

Breakeven Point = Fixed Cost/Contribution Per Unit

Contribution Per Unit ( Luxury box)

Revenue per box = $300,000

Contribution per box =    $150,000

So, Break even Point = 4,500,000 / 150,000 = 30 luxury boxes.

b. Recommendation Concerning Construction of Luxury Boxes:-

Since space is available for the construction of upto 50 luxury boxes and buyers are also available for the sale of 50 luxury boxes, then it is strongly recommended to construct 50 boxes as the break even point is 30 boxes. The contibution from the excess of 30 boxes .i.e. from 20 boxes will be profit as calculated below:

Anticipated Profit:- $

Revenue (50 boxes * 300,000 per box) = 15,000,000

Less: Variable Cost (50 boxes * 150,000 per box) = 7,500,000

Total Contibution = 7,500,000

Less: Fixed Cost = 4,500,000

Anticipated Profit = 3,000,000

This is equal to Contribution from 20 boxes = 20 boxes * 150,000 per box = $3,000,000.