Question

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 $2.0 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 significantly reduced demand for the toy truck. Now, the original manufacturer is deciding whether they should continue production of the toy truck. If the estimated demand is 100,000 trucks, what is the break-even price for the toy truck? Should you shut down?

Answer 1

$23 per truck

Step-by-step explanation:

Break- even analysis:

2,000,000 ÷ 100,000

= 20 per truck

Break-even price per truck :

= Price per truck + Labor and the cost of materials for each truck

= $20 per truck + $3 MC per truck

= $23 per truck

Relevant costs = 2,000,000

Note: (not $2.6 because the $2.5 million paid for the injection mold machine and the $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 per truck then they should shut down.