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