Which Rosario Company Is Located In Buenos Aires

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Rosario Company, located in Buenos Aires, Argentina, manufactures components used in farm machinery. The firm's fixed costs are 3,500,000 pesos annually. The variable cost per component is 1,400 pesos, and each component is sold for 3,300 pesos. In the prior year, the company sold 5,000 components. Argentina’s peso was valued at 0.327 USD on the day the exercise was written. Income taxes are to be ignored for these calculations.

Requirement 1: Calculate the breakeven point in units, rounding to the nearest whole number.

Requirement 2: Determine the new breakeven point if fixed costs increase by 15%, rounding to the nearest whole number.

Requirement 3: Find the company's net income for the prior year (excluding the peso sign).

Requirement 4: If the sales price drops to 2,800 pesos, and this results in an increase of 1,800 in sales volume, what will the new breakeven point be?

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Paper For Above instruction

Introduction

Break-even analysis is an essential tool in managerial finance, enabling companies to determine the minimum sales volume needed to cover all fixed and variable costs. Rosario Company’s operations, situated in the economically pivotal Buenos Aires, reflect a typical manufacturing concern where understanding cost structures and pricing strategies is vital. Through detailed calculation of the break-even point under different scenarios, this paper explores the company's financial thresholds and profitability metrics, emphasizing the importance of contribution-margin analysis and cost-volume-profit (CVP) analysis in strategic decision-making.

Calculation of the Original Break-Even Point

The baseline for Rosario’s operations involves fixed costs of 3,500,000 pesos annually, variable costs of 1,400 pesos per component, and a selling price of 3,300 pesos per component. To find the breakeven point in units, the contribution margin per unit is calculated by subtracting the variable cost from the selling price:

Contribution margin per unit = 3,300 - 1,400 = 1,900 pesos.

Next, the breakeven point in units (Q) is derived using the formula:

Q = Fixed Costs / Contribution margin per unit.

Thus,

Q = 3,500,000 / 1,900 ≈ 1842.11 units.

Rounding to the nearest whole number yields a breakeven point of approximately 1,842 components.

Impact of an Increase in Fixed Costs on Breakeven Point

If fixed costs grow by 15%, the new fixed costs become:

New Fixed Costs = 3,500,000 × 1.15 = 4,025,000 pesos.

Applying the same contribution margin per unit:

New Breakeven Point = 4,025,000 / 1,900 ≈ 2121.05 units.

Rounding to approximately 2,121 components. This highlights how increases in fixed expenses directly raise the sales volume required to attain profitability.

Net Income for the Prior Year

To compute the prior year’s net income, first identify total sales revenue and total variable costs:

Total sales revenue = 5,000 units × 3,300 pesos = 16,500,000 pesos.

Total variable costs = 5,000 units × 1,400 pesos = 7,000,000 pesos.

Total contribution margin = Revenue - Variable costs = 16,500,000 - 7,000,000 = 9,500,000 pesos.

Subtracting fixed costs:

Net income = Total contribution margin - Fixed costs = 9,500,000 - 3,500,000 = 6,000,000 pesos.

The company’s net income for the prior year is 6,000,000 pesos.

Effect of Price Reduction on Break-Even Point

If the sales price drops to 2,800 pesos and sales increase by 1,800 units (total units sold = 5,000 + 1,800 = 6,800), the contribution margin per unit becomes:

Contribution margin per unit = 2,800 - 1,400 = 1,400 pesos.

The new breakeven point is:

Q = Fixed Costs / Contribution margin per unit = 3,500,000 / 1,400 ≈ 2,500 units.

This demonstrates that lowering the unit price, despite volume increases, raises the breakeven threshold, necessitating approximately 2,500 components in sales to cover costs under the new pricing.

Conclusion

The analysis underscores the sensitivity of the breakeven point to changes in fixed costs and pricing strategies. Rosario’s scenario illustrates how incremental cost adjustments and market conditions can significantly impact profitability thresholds. Strategic management must continuously monitor these variables to optimize sales and operations effectively.

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