Determine the dollar sales volume the firm/ Managerial Economics
Orange Corporation is evaluating its financing needs for the coming year. The company has been in business for only three years, and the company’s chief financial officer (Erica Stevens) predicts that the firm’s operating expenses, current assets, and current liabilities will remain at their current proportion of sales.
Last year Orange had $20 million in sales with net income of $1 million. The firm anticipates that next year’s sales will reach $27 million with net income rising to $2 million. Given its present high rate of growth, the firm retains all its earnings to help defray the cost of new investments.
The firm’s balance sheet for the year just ended is found below:
12/31/09 % of sales
Current Assets $4,000,000 20%
Net Fixed Assets $8,000,000 40%
Total Assets $12,000,000
Accounts Payable $3,000,000 15%
Long-term debt $2,000,000 NA
Total Liabilities $5,000,000
Common Stock $1,000,000 NA
Paid-In Capital $1,800,000 NA
Retained Earnings $4,200,000 NA
Total Equity $7,000,000 NA
Total Liability & Equity $12,000,000
1. Estimate Orange’s total financing requirements for 2010 and its net funding requirements.
2. Orange Company is considering manufacturing communication equipment for the military. The average selling price of its finished product is $175 per unit. The variable cost for these same units is $140 per unit. This project incurs fixed costs of $550,000 per year.
1. What is the break-even point in units for the project?
2. What is the dollar sales volume the firm must achieve to reach the break-even point?
3. What would be the firm’s profit or loss at the following units of production sold: 12,000 units? 15,000 units? 20,000 units?
