a firm is considering introducing a new product for which demand is relatively u

Question

a firm is considering introducing a new product for which demand is relatively uncertain. introducing this new product will require the firm to configure and operate a new production system. the firm has two choice: option A, with annual fixed costs of $625,000 and variable costs of $0.25 per unit; or Option B, with annual fixed costs of $1,250,000 and variable costs of $0.20 per unit. Per-unit revenue is expected to be $1.50. What is the minimum annual volume required to make introducing this new product profitable?

A. 100,001

B. 500,001

C. 20,001

D. 200,001

Explanation / Answer

Oprtion A:

Break even point = Fixed cost / price - variable cost

Break even point option A = 625,000 / (1.50-0.25) = 500,000 this is the point where the company doesnt lose money but doesnt make money either, by selling one more unit they will have profits: 500,0001

Option B:

Break even point option B = 1250000 / ( 1.50 - 0.20 ) = 961,538 this is the break even point for option B, to make profit the company would need to sell 961,539 and because that is not an option on the possible solutions the answer is:

B. 500,001 which comes from using option A

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