Doug Robinson Is Considering the Possibility of Opening His Own

question 67

Essay

Doug Robinson is considering the possibility of opening his own manufacturing facility. He expects first-year sales to be $800,000, and he feels that his variable costs will be approximately 40% of sales. His fixed costs in the first year will be $200,000.
Doug is considering two ways of financing the firm: (a) 40% equity financing and 60% debt at 10%, or (b) 100% equity financing. He can sell common stock to his relatives for $10 per share. Either way, he will need to raise $1,000,000.
-Compute his break-even point in dollars.

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Definitions:

Equilibrium Price

The price at which the quantity of a good demanded by consumers balances the quantity supplied by producers, resulting in a stable market condition.

Suppliers

Businesses or individuals that provide goods or services to another entity, often in exchange for monetary compensation.

Surpluses

Occurs when the quantity supplied of a product exceeds the quantity demanded, often leading to a drop in prices.

Price Up

An increase in the cost of goods or services in the market.