P13-7 Breakeven analysis Molly Jasper and her sister, Caitlin Peters, got into the novelties business almost by accident. Molly, a talented sculptor, often made little figurines as gifts for friends. Occasionally, she and Caitlin would set up a booth at a crafts fair and sell a few of the figurines along with jewelry that Caitlin made. Little by little, demand for the figurines, now called Mollycaits, grew, and the sisters began to reproduce some of the favorites in resin, using molds of the originals. The day came when a buyer for a major department store offered them a contract to produce 1,500 figurines of various designs for $10,000. Molly and Caitlin realized that it was time to get down to business. To make bookkeeping simpler, Molly had priced all the figurines at $8.00 each. Variable operating costs amounted to an average of $6.00 per unit. To produce the order, Molly and Caitlin would have to rent indus- trial facilities for a month, which would cost them $4,000. a. Calculate Mollycaits' operating breakeven point. b. Calculate Mollycaits' EBIT on the department store order. c. If Molly renegotiates the contract at a price of $10.00 per figurine, what will the EBIT be? d. If the store refuses to pay more than $8.00 per unit but is willing to negotiate quantity, what quantity of figurines will result in an EBIT of $4,000? e. At this time, Mollycaits come in 15 different varieties. Whereas the average vari- able cost per unit is $6.00, the actual cost varies from unit to unit. What recom- mendation would you have for Molly and Caitlin with regard to pricing and the numbers and types of units that they offer for sale? P13-7 Breakeven analysis Let Q = unit sales, FC = fixed cost, P = price, and VC = variable cost per unit. a. Bitcakesen = FC = (P-VC)= $ 2.000 figurines. b. Sales Less: Fixed costs Variable costs ($ 2 X 1,500 units) Total cost = Earnings before interest and taxes (EBIT) -$ 3.000 C. Sales $4 Less: Fixed costs Variable costs ($ X Total cost $e = EBIT $ d. EBIT = Sales revenue - Total cost (= Fixed cost + Variable cost) = (PxQ) - FC-IQ X VC) Given P= ,FC = ,,VC = , and EBIT = $ _, solve for Q. e. One alternative is to price the units differently based on variable cost. Those more costly to produce would have higher prices than the less expensive production models. If Molly and Caitlin want to maintain the same price for all units, they may need to reduce selection from the 15 types currently available to a smaller number that includes only those with an average variable cost below $5.33 (58 - $4,000/1,500 units)