Problem 3

The plant ships its products nationally from one location in the Southeast. Seventy percent of the

Market for this product is located within a 600 mile radius of the plant. The plant has a capacity capable

of producing 300,000 units per annum with its six presses. Existing business calls for about 270,00 units

per annum which means the plant operates at about 90 percent capacity. From time to time, business

activity has been higher than 90 percent, but it has not achieved 100 percent in the past three years.

It is well known by division management that a large market exists in California, and it is estimated that

California will be the fastest growing market segment in the country for the predictable future. This

market has not been pursued, however, because it is not as profitable as existing business. There are

many producers competing in the California market, which depresses the price below levels achieved in

other areas. The competition is so strong that customers demand that the price of the product include

installation. In other markets, the customer secures and pays for the installation. This coupled with the

higher freight costs to ship to California and the costs that would have to be incurred to set up a

stocking warehouse have precluded any serious consideration of entering the market.

Realizing that the plant was operating at less than full capacity, management wanted to evaluate the

possibility of entering this market even if it meant accepting lower margins. The reasoning was that

additional business, even marginally profitable business, was an additional profit opportunity. It was

reasoned further that any profitable use of capacity was better than letting the equipment go unused.

Selling price $ 250.00/unit

Installation cost 45.00/unit

Production/Warehouse handling 125.00/unit

Warehouse storage 4.50/unit

Freight 35.00/unit

Sales force 100,000.00/year

Building 25,000.00/year

Based on this information, you decide to do a breakeven analysis and calculate the breakeven point in

units for setting up a warehouse and entering the California market. Since it has been some time since

you have done a breakeven analysis, your recollection of the formula is somewhat rusty. At first

attempt you calculate four different solutions. However, only one is the correct breakeven point based

on the appropriate formula.

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