To be profitable, a firm must recover its costs. These costs include both its fixed and its variable costs. One way that a firm evaluates at what stage it would recover the invested costs is to calculate how many units or how much in dollar sales is necessary for the firm to earn a profit.

Consider the case of Free Spirit Industries Inc.:

Free Spirit Industries Inc. is considering a project that will have fixed costs of $$12,000,000.$ The product will be sold for $$37\mathrm{.}50$ per unit, and will incur a variable cost of $$10\mathrm{.}75$ per unit.

Given Free Spirit$$s cost structure, it will have to sell units to break even on this project $($QBE

$).$

Free Spirit Industries Inc.$$s marketing sales director doesn$$t think that the market for the firm$$s goods is big enough to sell enough units to make the company$$s target operating profit of $$25,000,000.$ In fact, she believes that the firm will be able to sell only about $150,000$ units. However, she also thinks the demand for Free Spirit Industries Inc.$$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 CFO$$s EBIT goal of $$25,000,000?$

$$296\mathrm{.}03$ per unit

$$257\mathrm{.}42$ per unit

$$270\mathrm{.}29$ per unit

$$321\mathrm{.}78$ per unit

What affects the firm$$s operating break$-$even point?

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

Increase

Decrease

No Change

The product$$s sales price increases.

The amount of debt increases, causing the firm$$s total interest expense to increase.

The firm depreciates its fixed assets more quickly over a shorter life.

When fixed costs are high, a small decline in sales can lead to a decline in return on invested capital $($ROI$).$