Question

ZeroSun Pictures is a Denver-based video production start-up agency. Imagine the founders are currently trying to decide between two cost structures, one that has a greater proportion of fixed costs (e.g., proprietary equipment), the other that is more heavily weighted to variable costs (e.g., leased equipment). Estimated revenue and cost data for each alternative is as follows:

Alternative #1 Alternative #2
Selling price per unit $100 $100
Variable cost per unit $85 $80
Fixed cost per year $40,000 $45,000

a. Under Alternative #1, what is the amount of revenues that would allow the company to breakeven?
b. What sales volume, in units, is needed for the total costs in each structure alternative to be the same?

Answer 1

Results are below.

Step-by-step explanation:

Giving the following information:

Alternative #1 Alternative #2

Selling price per unit $100 $100

Variable cost per unit $85 $80

Fixed cost per year $40,000 $45,000

To calculate the break-even point in sales, we need to use the following formula:

Break-even point (dollars)= fixed costs/ contribution margin ratio

Break-even point (dollars)= 40,000 / [(100 - 85) / 100]

Break-even point (dollars)= $266,666.67

Now, we can determine the sales volume for the two options:

Alternative 1:

Total cost= 40,000 + 85x

Alternative 2:

Total cost= 45,000 + 80x

x= number of units

40,000 + 85x = 45,000 + 80x

5x = 5,000

x= 1,000 units

The indifference point is 1,000 units.

Prove:

Total cost= 40,000 + 85*1,000= $125,000

Total cost= 45,000 + 80*1,000= $125,000