Question

The Great Fish Taco Corporation currently has fixed operating costs of $15,000​, sells its​ pre-made tacos for $6.00 per​ box, and incurs variable operating costs of $2.50 per box.

If the firm has a potential investment that would simultaneously raise its fixed costs to $16,500 and allow it to charge a​ per-box sale price of $6.50 due to​ better-textured tacos, what will the impact be on its operating breakeven point in​ boxes?

Answer 1

The investment would increase the company's operating breakeven point from 4,000 to 4,125 boxes, requiring the sale of an additional 125 boxes to break even.

Step-by-step explanation:

The scenario describes the effect of an investment decision on the operating breakeven point of the Great Fish Taco Corporation. The company's fixed costs would increase from $15,000 to $16,500, but the increased quality of the product allows them to charge $0.50 more per box, increasing the sale price from $6.00 to $6.50. To calculate the new breakeven point in boxes, we use the formula: Breakeven Point in Boxes = Fixed Costs / (Sale Price per Box - Variable Cost per Box). The original breakeven point is $15,000 / ($6.00 - $2.50) = 4,000 boxes. With the new investment, the breakeven point becomes $16,500 / ($6.50 - $2.50) = 4,125 boxes. Thus, the new breakeven point will be higher, requiring an additional 125 boxes to be sold to cover the increased fixed costs.

Answer 2

Answer: The Break-Even Point will reduce from $4,285.71 to $4,125

Step-by-step explanation:

To get the Break-Even Point we can divide Fixed Assets by the Contribution margin.

The Contribution Margin is the Selling Price minus the Variable Cost.

For Scenario 1 the Break-Even Point will be,

= 15,000 / ( 6 - 2.50)

= $4,285.71

For Scenario 2 the Break-Even Point is,

= 16,500 / 6.5 -2.5

= $4,125

The Break-Even Point for Scenario 2 means that even though the higher Fixed Costs could have led to a higher Break-Even Point, the higher price contributed more than the fixed costs did and led to an ultimately lower Break-Even Point than the first Scenario.