Jay Yang, EMBA-GA alumnus, is COO of Hen Hao Corporation. Answering his iPhone, his Board Chairman says:
"Jay. Those pesky Sarbanes-Oxley and Dodd-Frank things are causing our board members to ask more questions."
"Today two called asking for our break-even, and which product is most profitable."
"I'm sure you can handle it. By the way, we'll need answers by tomorrow morning's Board meeting at 9 am."
Hen Hao Corporation manufactures three different products in one facility.
Annual data are below:
|
|
Product A
|
Product B
|
Product C
|
|
Unit sales volumes
|
100,000
|
400,000
|
500,000
|
|
Unit sales prices
|
¥1.60
|
¥1.20
|
¥0.70
|
|
Variable costs per unit
|
¥0.75
|
¥0.85
|
¥0.30
|
Total Fixed Costs = ¥400,000 per year
Market conditions for all three products are highly competitive, so the company can't raise its prices without losing many customers.
Required:
1. What is the company's break-even point in total sales revenue? What are your assumptions?
2. Of the total fixed costs, ¥20,000 could be avoided if product A were dropped, ¥30,000 could be avoided if product B were dropped, and ¥110,000 could be avoided if product C were dropped. The remaining fixed costs ¥240,000 (the CEO's salary) can be avoided only by going out of business entirely. What is the break-even quantity for each product? If the company operates at exactly this break-even for every product, what is the overall
profit?
3. Which product is most profitable? Least profitable?
4. Should the least profitable product be dropped?