Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 48

CVP Relationships The following is taken from a recent media report about Gateway, Inc., which provides products and services in the PC industry.

“Gateway’s loss in the quarter that ended June 30 nearly tripled to $61 million on revenues of $1 billion. . . . To break even, Gateway would need to boost unit sales a mind-numbing 43%, from 651,000 in the second quarter to 933,000 units.”

Gateway has a mere 5.6 percent of the U.S. market. The media report is projecting a 5 percent rise in unit sales next quarter.

Required

1. Estimate Gateway’s variable cost per unit and fixed cost per year.

Hint: First determine price from the available information and then develop two breakeven models: one for the quarter ended June 30 in which there was a loss of $61 million and another for breakeven for the third quarter in which sales are expected to be 933,000 units. Using the two models, solve for v.

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2. Determine the required market share Gateway needs to have in order to break even next quarter.

Step 1 of 9

Breakeven Point in Units

The breakeven point also known as the breakeven level is can be defined as that level of operations where the company’s revenue is just enough to meet its costs. It is the point at which the company makes no profit no loss and just meet its costs. The breakeven point has a profit equal to zero and revenues exactly equal to the total of variable and fixed costs incurred by the company.