CHAPTER 5

1. Eastern Semiconductor is currently selling its most popular microchip for $220. It
has been selling 4,000 of these chips per month. The company has learned, however,
that next month an overseas competitor will enter the market and start selling a copy
of this chip for $200. If Eastern maintains its price of $220 per chip, it expects its
sales to decrease to 3,000 units per month.

a. Given that Eastern’s variable costs for this product are $40 per chip, what is the
breakeven sales level for Eastern decreasing its price by $20 price per chip?

New price = $220 - $20 = $200

Breakeven Sales Level :

= (price per chip × number of product) / (Price per unit - Variable costs)
= (200 × 4000) / (200 - 40)
= 800000 / 160
= 5000 chips per month

b. Do you think it is likely that Eastern will achieve this breakeven sales level?
That Eastern will achieve this breakeven sales level because this breakeven
computation indicates that his sales level would have to increase by more than 5000
chips per month before his profits would start to increase.
2. Plasiderm, Inc., sells a medical product. The company is currently selling the
product for $18/unit and is considering whether it could increase profits by increasing
the product’s price to $20/unit. Plasiderm currently sells 50,000 units per week. Its
current weekly operating data are as follows:

Sales revenue $900,000

Variable cost $400,000
Fixed cost $250,000
Pretax profit $250,000

You can assume that per-unit variable costs do not vary with the level of production.

a. What is the breakeven sales level for the price increase that Plasiderm is
considering? Explain what this breakeven sales level means.

P0 = $18
P1 = $20

Contribution margin per unit = Selling price per unit - Variable cost per unit
= 20 - 8 = $2

Breakeven point = Fixed costs / Contribution margin per unit

= 250000 / 2
= 125000 units

= 0 - ( 2 × 50000 ) / ( 20 - 18)
= ( -100000) / 2
= -50000

b. If the sales level for this product decreased by 5,000 units per week after the price
increase, what would be the change in Plasiderm’s weekly pretax profits caused by
the price increase?

Change in profit = (-5000 - (-8333) × 12 = 39996 per weeks

c. What would be Plasiderm’s profit change if, after the price increase, sales remained
at 50,000 units per week?

Change in profit = (0 - (-8333) × 12 = 99996 per weeks

3. A heating oil retailer has been buying heating oil at $2.82 per gallon and keeps a
30- day supply on hand. He sells 5,000 gallons per day and has been charging his
customers $3.25 per gallon. The retailer has nonincremental fixed costs of $800 per
day. Yesterday the wholesale price of heating oil decreased from $2.82 per gallon to
$2.68 cents per gallon.

a. What is the per-gallon cost that is relevant for pricing decisions concerning heating
oil that the retailer will sell today? Explain your answer.

b. If the heating oil retailer is planning to respond to the wholesale price decrease by
lowering his $3.25-per-gallon retail price, should he wait 30 days to make that price
change? Explain youranswer