Languages, Inc. manufactures hand held computers that translate between two languages. Based on their market research, they have developed computers for French/English, German/English, and Spanish/English. The process for making the computers will have fixed costs of $2,000,000 per year and variable costs of $50 per computer. The company believes that it can sell at least 40,000 computers per year.

a) What should the price per computer be if the company wants to break even at a volume of 40,000 computers per year?

b) If they sell 60,000 computers at a price of $90 per computer, what will the contribution to profit be?

The process for making the computers will have fixed costs of $2,000,000 per year and variable costs of $50 per computer. The company believes that it can sell at least 40,000 computers per year.

To calculate the selling price we need to use the break-even formula:

Break-even point= fixed costs/ contribution margin

1) Break-even point= fixed costs/ contribution margin

40,000= 2,000,000 / (x - 50)

40,000*x - 2,000,000 = 2,000,000

40,000x = 4,000,000

x= $100

The selling price is $100

2) Sales= 60,000 units

Selling price= 90

Contribution margin= selling price - unitary variable cost

CM= 90 - 50= $40

Total CM= 40*60,000=$2,400,000

Net operating profit= 2,400,000 - 2,000,000= 400,000