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March 29, 2017

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We are starting a business and want to decide how much leverage to assume. In one scenario, we can invest $60,000 in the business and have variable cost of $.80 per unit. In the second scenario, we can invest $12,000; however, variable cost will now be $1.60 per unit, reflecting the higher labor contribution required to compensate for our minimal investment. In either case, revenue per unit will be $2.00.

a) What is the break-even point in volume for each scenario?
b) If our expected volume will be 40,000 units, which scenario would you choose, and why?
c) At 40,000 units and your preferred scenario, what is the profit or loss of the company?

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