from expected value? 7. Philip Neilson owns a fireworks store. Philip’s fixed costs are $12,000 a month, and each fireworks assortment he sells costs, on average, $8. The average selling price for an assortment is $25 a. (“) What is the break-even point for Philips fireworks store? Suppose Philip decides to expand his business. His new fixed expenses will be $20,000, but the average cost for a fireworks assortment will fall to just $5 due to Philip’s higher purchase volumes. b. () What is the new break-even point? c. (**) At what volume level is Philip indifferent to the two capacity alternatives outlined above? lled L affolin

a. Breakeven Point = Fixed cost / ( Sales per unit – variable cost per unit)

So, For the given case, Breakeven point for Philips fireworks= 12000/(25-8) = 706 Units

b. Breakeven point for the new case = 20000/(25-5) = 1000 Units

c. For Philip to be indifferent, the total cost for the product must be same in both the capacity alternatives.

Let at volume Q, the total cost is equal for both the cases.

Then we have,

12000+ (8*Q) = 20000+(5*Q) => 3Q = 8000 => Q = 2666.66 ~ 2667 Units.

So, at 2667 units Philip will be indifferent to the two capacity alternatives.

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