4. Break-even analysis

Consider the case of Petrox Oil Co.: Petrox Oil Co. is considering a project that will have fixed costs of $12,000,000. The product will be sold for $32.50 per unit, and will incur a variable cost of $10.75 per unit.

1. Given Petroxs cost structure, it will have to sell AMOUNT units to break even on this project (QBEBE).

2. Petrox Oil Co.s marketing sales director doesnt think that the market for the firms goods is big enough to sell enough units to make the companys target operating profit of $25,000,000. In fact, she believes that the firm will be able to sell only about 150,000 units. However, she also thinks the demand for Petrox Oil Co.s product is relatively inelastic, so the firm can increase the sale price. Assuming that the firm can sell 150,000 units, what price must it set to meet the CFOs EBIT goal of $25,000,000?

a. $296.03

b. $270.29

c. $257.42

d. $321.78

3. Several factors affect a firms operating break-even point. Based on the scenarios described in the following table, indicate whether these factors would increase, decrease, or leave unchanged a firms break-even quantityassuming that only the listed factor changes and all other relevant factors remain constant.

	Increase	Decrease	No Change
a. The firm depreciates its fixed assets more quickly over a shorter life.
b. The products sales price increases.
c. The amount of debt increases, causing the firms total interest expense to increase.

4. When a large percentage of a firms costs are fixed, the firm is said to have a HIGH/LOW degree of operating leverage.