ASSIGNMENT UNIT 4 1

Assignment Unit 4

University of the People

BUS 3301

8 July 2022
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Greg Morrison recently graduated from construction engineering school. He is

considering opening his own construction business providing module housing.

Providing module homes is a high-fixed cost business, as it requires considerable

expenditures for facilities, labor, and equipment, no matter how many families are

served. Assume the annual fixed cost of operations is $800,000. Further assume that the

only significant variable cost relates to the module homes, themselves. An average

module home costs $12,000. Greg’s banker has asked a variety of questions in

contemplation of providing a loan for this business:   (a) If the average family is charged

$18,000 for installation of a module home, how many families must be served to clear

the break-even point? Break-even units= total fixed costs/ contribution margin per unit

800,000/6,000= 133.3 This means that at least 133 families must be served in order for

Greg to reach the break-even point. This means that when 133 units have been sold

there will be no profit or loss (Walther, 2012). (b) If the banker believes Greg will only

serve 100 families during the first year in business, how much will the business lose

during its first year of operation? Sales (100x6,000)= $600,000 Contribution margin-fixed

cost= net loss 600,000-800,000=-200,000 This means that if only 100 families are served

during the first year of business, then Greg will suffer a net loss of $200,000. (c) If Greg

believes his profits will be at least $100,000 during the first year, how much is he

anticipating for total revenue? Sales to achieve target income= (total fixed costs +

target income)/contribution margin ratio (Walther, 2012). (800,000 + 100,000)/.66=

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1,363,636 This means that Greg will have to make a total revenue of $1,363,636 in order

for their to be $100,000 in profits. (d) The banker has suggested that Greg can reduce

his fixed costs by $150,000 if he will not buy any vehicles. Greg can instead rent vehicles

as needed. The variable cost of renting is $700 per family served. Will this suggestion

help Greg reach the break-even point sooner? Total fixed cost- savings from rentals=

new total fixed cost 800,00-150,000=650,000 Price per unit- (variable cost + rental fee)=

cost margin per unit 18,000-(12,000+700)= 5300 Total fixed cost/cost margin per unit=

break-even 650,000/5300= 122.64 Yes, the suggestion to rent vehicles as needed would

help Greg reach the break-even point sooner. This is because the total fixed cost is

lower, and even though the variable cost is $700 higher, the drop in total fixed cost

outweighs the increase. It now takes only 123 families served to reach the break-even

point as opposed to the previous 133 when fixed costs were at $800,000.   References

Walther, L.M. (2012). Principles of accounting. Logan, UT: Utah State

University. http://www.principlesofaccounting.com/