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 construction
of luxury boxes? What profit is anticipated?

Solution

(A)

Fixed Cost=F=$4,500,000
Variable Cost per unit=V=$150,000
Price per unit=P=$300,000

So for break even point

(Price per unit)(break even units) = F.C + (V.c per unit)(break even units)

300,000x = 4,500,000 + 150,000x

150,000x = 4,500,000

x = 30 units

(B)

Since 50 is more than break even point there will be profit

Profit = (Price per unit)(50) - (F.C + (V.c per unit)(50)) = 300,000*50 -( 4,500,000 + 150,000*50) = $ 3,000,000

Profit = $ 3,000,000