Fixed cost/year = $120000 Variable cost/year = $15 A) determine the break even v
ID: 1189433 • Letter: F
Question
Fixed cost/year = $120000 Variable cost/year = $15A) determine the break even volume if each unit can be sold for $40
B) if a net profit of $100000 is required determine the number of units that need to be sold Fixed cost/year = $120000 Variable cost/year = $15
A) determine the break even volume if each unit can be sold for $40
B) if a net profit of $100000 is required determine the number of units that need to be sold Variable cost/year = $15
A) determine the break even volume if each unit can be sold for $40
B) if a net profit of $100000 is required determine the number of units that need to be sold
Explanation / Answer
Breakeven point is the point at which the firm’s average variable cost is at its minimum level. If the price of the good falls below this point the firm will shut down as it isn’t able to cover its average variable cost. Therefore, at breakeven the firm is earning zero economic profits.
Profit = Total Revenue – Total Cost …………………………………………………………(1)
Total Revenue (TR) = P*Q where P is price & Q is the total output
TR = 40*Q as price is given to be at 40 …………………………………….……………..(2)
Total Cost (TC) = Fixed Cost + Variable Cost
TC = 120000 + 15*Q ………………………………………………………………………………..(3)
Now, at breakeven point Profit = 0 (Zero). Therefore, from equation (1) we have
Total Revenue – Total Cost = 0
TR = TC
40*Q = 120000 + 15*Q [From (2) & (3)]
(40 – 15)*Q = 120000
25*Q = 120000
Q = 4800
In order to earn a profit of $100000, the number of units that are required to be sold can be calculated as
Profit = TR – TC [From (1)]
100000 = 40*Q – [120000 + 15*Q] [From (2) & (3) & profit is given]
100000 + 120000 = (40 - 15)*Q
220000 = 25*Q
Q = 8800
Q = 4800
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