The state of Louisiana plan to embark on a project but want to estimation as to

Question

The state of Louisiana plan to embark on a project but want to estimation as to wheyher to borrow funds from other government project to finance the project or help finance other projects from the proceeds of this project in question. The government has plan to produce 10 units of the project at a fixed cost of $100. The variable cost of this project differs according to the units produced, from 0-10. which are; $0,$90,$170,$240,$300,$370,$450,$650,$780,and $930. With a per unit price of $131.00, will the government require subsidy or contribution at other operation levels.

Explanation / Answer

total cost = FC+VC = 100+930 = 1030

cost per unit = 1030/10 = $103

Sale price = $131

sale price is greater than cost per unit so govt do not require subsidy at level 10 units

when level is 9 units

cost per unit = 880/9 = $97.77

when level is 1 unit

cost is 100+90 = 190. so it require subsidy

when level is 2 unit

cost per unit = 100+170)/2 = $135 therefore it require subsidy

when level is 3 unit

cost per unit = 100+240)/3 = $113.33

so it will not require subsidy

so govt require subsidy upto 2 units

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