This question is engineering economics. A firm has the capacity to produce 1,000
ID: 1167443 • Letter: T
Question
This question is engineering economics.
A firm has the capacity to produce 1,000,000 units of a product each year. At present, it is operating at 70 percent of capacity. The firm’s annual revenue is $700,000. Annual fixed costs are $300,000, and the variable costs are $0.50 per unit.
A firm has the capacity to produce 1,000,000 units of a product each year. At present, it is operating at 70 percent of capacity. The firm’s annual revenue is $700,000. Annual fixed costs are $300,000, and the variable costs are $0.50 per unit.
Explanation / Answer
Annual production = 70% of 1000000 = 700000 units
Annual Revenue = $700000
Selling price per unit = $1
Total Cost = $300000 + $0.5 x 700000 = $650000
Profit = $700000 – $650000 = $50000
Break Even Units = Fixed Cost / (Selling Price – Variable Cost) = 300000 / (1 –0.5) = 600000 units
Production at 90% = 90% of 1000000 = 900000 units
Annual Revenue at 90% = $900000
Total Cost = $300000 + $0.5 x 900000 = $750000
Profit = $900000 – $750000 = $150000
Profit = $90000
Volume with profit $90000 = Fixed Cost + Profit / Price – Variable Cost = 390000 / 0.5 = 780000 units
1000000 = 100% capacity hence 780000 = 78% capacity.
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