1.(Break-even point) Napa Valley Winery (NVW) is a boutique winery that produces a high-quality, nonalcoholic red wine from organically grown cabernet sauvignon grapes. It sells each bottle for $30. NVW’s chief financial officer, Jackie Cheng, has estimated variable costs to be 70 percent of sales. If NVW’s fixed costs are $360,000, how many bottles of its wine must NVW sell to break even?
2. (Break-even point and operating leverage) Some financial data for each of three firms are as follows:
BLACKSBURG FURNITURE LEXINGTON CABINETS WILLIAMSBURG COLONIALS Average selling price per unit $ 15.00 $ 400.00 $ 40.00
Average variable cost per unit $ 12.35 $ 220.00 $ 14.50
Units sold 75,000 4,000 13,000
Fixed costs $35,000 $100,000 $70,000
What is the profit for each company at the indicated sales volume? What is the break-even point in units for each company? What is the degree of operating leverage for each company at the indicated sales volume? If sales were to decline, which firm would suffer the largest relative decline in profitability?