A startup founder has developed a new product to sell on the startup's website. The setup (fixed) costs for the new product are $700,000. The variable cost per product is $3 and each product will sell for $10. Based on her research, the entrepreneur projects that the company will sell 10,000 products a month. She will only go forward with production and sale of the new product if it's profitable within 12 months based on the projections described. Based on our class discussion and using only the details provided in this question, which of the below are correct? (select all that apply)

Question

A startup founder has developed a new product to sell on the startup's website. The setup (fixed) costs for the new product are $700,000. The variable cost per product is $3 and each product will sell for $10. Based on her research, the entrepreneur projects that the company will sell 10,000 products a month. She will only go forward with production and sale of the new product if it's profitable within 12 months based on the projections described. Based on our class discussion and using only the details provided in this question, which of the below are correct? (select all that apply)

BlackTom AI · Accepted Answer

First, restating the core numbers helps anchor the analysis: fixed/setup costs are $700,000, variable cost per unit is $3, selling price per unit is $10, and the projection is 10,000 units per month. The contribution margin per unit is 10 − 3 = $7, so for each month the project generates 10,000 × $7 = $70,000 in gross contribution toward fixed costs and profit.

Option 1: 'per her projections, the product will reach breakeven in 10 months' — To find the break-even time, divide the fixed costs by the monthly contribution: $700,000 ÷ $70,000 = 10 months. This means the cumulative contribution from month 1 through month 10 will equal the fixed costs, reaching a zero net profit at month 10 if the monthly units and prices remain as projected. After month 10, any additional months contribute to profit because fixed costs are already covered.

Option 2: 'she will go forward with the project launch' — The 12-month projection yields total units = 12 months × 10,000 units/month = 120,000 units. Total contribution over 12 months = 120,000 × $7 = $840,000. Subtract fixed costs of $700,000, leaving a net profit of $140,000 within the 12-month horizon. Because this net result is positive within the 12-month window, the project would be profitable under the given projections.

Additional nuance: This analysis assumes the only inputs are the values provided (pricing, costs, and sales volume) and that the 12-month window is the decision horizon. It does not account for potential risks such as demand variability, cost changes, or implementation delays, which could alter the breakeven timing or profitability. However, strictly from the numbers given, the monthly contribution of $70,000 leads to a 10-month break-even, and the 12-month projection yields a positive profit, indicating profitability within the 12-month period.

In summary, the calculated break-even time is 10 months, and the 12-month projection indicates positive profitability, consistent with proceeding under these assumptions.

ES 212 003 FA 2025 Quiz 3

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