[Urbandar]

Greg Morrison recently graduated from construction engineering school. He is considering opening his own construction business providing module housing. Providing module homes is a high-fixed cost business, as it requires considerable expenditures for facilities, labor, and equipment, no matter how many families are served. Assume the annual fixed cost of operations is $800,000. Further assume that the only significant variable cost relates to the module homes, themselves. An average module home costs $12,000. Greg's banker has asked a variety of questions in contemplation of providing a loan for this business:

(a) If the average family is charged $18,000 for installation of a module home, how many families must be served to clear the break-even point?

(b) If the banker believes Greg will only serve 100 families during the first year in business, how much will the business lose during its first year of operation?

(c) If Greg believes his profits will be at least $100,000 during the first year, how much is he anticipating for total revenue?

(d) The banker has suggested that Greg can reduce his fixed costs by $150,000 if he will not buy any vehicles. Greg can instead rent vehicles as needed. The variable cost of renting is $700 per family served. Will this suggestion help Greg reach the break-even point sooner?

[paraclete]

From what I can see breakeven analysis is an inappropriate tool for assessing the viability of this operation which fails just on a reading of the "facts" the initial breakeven is 133 units