Question & Answer: 1. Sound Systems Inc. produces and markets wireless speakers. Management is thinking about…..

1. Sound Systems Inc. produces and markets wireless speakers. Management is thinking about developing a new model, the SonicBoom. The SonicBoom will cost approximately $65 per unit to produce, and will be sold to retailers (such as Fry’s and Best Buy) at a price of $120, with a suggested retail price (i.e., the amount charged by retailers to consumers) of $199. Sound Systems Inc. estimates that it will incur annual costs of $3.5 million to advertise and promote the SonicBoom, $2.5 million to cover selling and distribution expenses, and another $2 million to cover fixed overhead expenses. Based on this information, how many units does Sound Systems Inc. need to sell in order to break even? (Hint: Keep in mind that SoundSystems is not a retailer.) 2. If Sound Systems Inc. sells 200,000 units of the SonicBoom in a given year how much profit (or loss) would it realize? 3. If Sound Systems Inc. were to spend an additional $1 million on advertising (i.e., on top of the amount specified in #1), how many additional units would it have to sell to break even? 4. If Sound Systems Inc. were to lower the wholesale price to $105 (i.e., the amount paid by retailers), and set the MSRP (manufacturer’s suggested retail) price at $179, how many additional units would it have to sell in order to earn the same amount of profit as in #2? (Use the information from problems #1 and #2.)

Expert Answer

Answer

Firstly, for Sound Systems Inc to break even, it is not necessary for our retailers to break even too. So here for us the Selling price per unit to be considered will be $120 only.

Our other costs (in millions)are:

Advertising and promotional costs: $3.5

Selling and distribution expenses: $2.5

Fixed overhead expenses: $2

So the total cost we incurr is $ (3.5+2.5+2) = $8 Mn. All these costs are fixed costs for us as they donot change with the quantity of goods sold.

Plus the production cost is $65 per unit.

Break-even point = Fixed costs/ (revenue-cost of production)= 8000000/ (120-65) = 145454.54 units. ans for 1.

2. If it sells 200000 units per year, it will have a revenue of 200000*120= 24000000$= $24Mn

The fixed costs are $8 Mn Plus the cost of production of each unit is $65 therefore, for 200000, cost of production =

$65*200000=$13Mn

Therefore we have a profit here of $24Mn -$13Mn= $9 Mn

3. Additional $1Mn would make the fixed cost= $9 Mn now.

therefore, number of units to break-even= 9000000/ (120-65) = 163636.36364

Additional units to be sold= 163636.36364-145454.54= 18181.82

4. Profit in 2 is $9Mn.

Break-even point= $8Mn/ (125-105) = 400000 units.

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