Question
Playtime Industries is considering a new product - an accessory to be sold to golfers. This product is completely independent of any of its existing
Playtime Industries is considering a new product - an accessory to be sold to golfers. This product is completely independent of any of its existing products; adding it to the product line would not add to or detract from the sales or costs of any other of Playtime's products. The new product is expected to sell for $20 per unit. Variable costs are expected to be $11 per unit and out-of-pocket fixed costs are expected to be $5,000 per month. These amounts may be assumed to hold constant over the eight-year planning horizon for this product. No portion of existing overhead has yet been allocated to this product. A specialized machine would be required, which would cost $160,000. The machine would have an eight-year life, with no salvage value anticipated. Straight-line depreciation is used. The company faces a 40 percent income tax rate. Playtime uses the same accounting policies for income tax reporting as it does for financial reporting. Playtime's cost of capital is 15 percent. However, no new financing is expected to be needed to implement this new product; sufficient internal resources are available to cover the necessary investment. You are asked to determine the level of monthly sales necessary for this product to "break-even." In so doing, consider different possible operational meanings which could be given to the concept of break-even
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