Airbolt Avionics makes aircraft instrumentation. Their basic navigation radio requires $ 120 in variable costs and requires $ 3 comma 000 per month in fixed costs. If it processes the radio further to enhance its functionality, it will require an additional $ 20 per unit of variable costs and $ 400 per month in fixed costs. The marketing manager believes the sales price of the radio can be increased from $ 270 to $ 300. In making this decision, the amount of additional fixed costs per month is a relevant cost.

regular sales price $270, total sales per month = 10 units

basic manufacturing costs:

variable cost per unit $120

fixed costs $3,000

if further processed, sales price $300

if further processed:

additional variable cost $20 per unit

additional fixed costs $400

At what sales price level would the new, improved radio begin to improve operating earnings?

                                    sales price $270                  

revenue                            $2,700

variable costs                  -$1,200

fixed costs                       -$3,000

operating income           -$1,500

                                    sales price $300                  

revenue                            $3,000

variable costs                  -$1,400

fixed costs                       -$3,400

operating income            -$1,800

Since relevant costs increase by $60 per unit (= $20 variable costs and $400/10 in fixed costs), then the sales price should increase more than $60 in order to lower the company's losses.

If the company wants to make a profit, then it should increase its sales price by more than $180 per unit. If the radio is processed further, in order to break even its sales price should be $480 per unit.

                                    sales price $480                  

revenue                            $4,800

variable costs                  -$1,400

fixed costs                       -$3,400

operating income                 $0

Any sales price above $480 will result in an operating profit.

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