Management believes it can sell a new product for $250.
The fixed costs of production are estimated to be $50,000 and the variable
costs are $215 a unit for the first scale of operations. The fixed costs
of production are estimated to be at $150,000 and variable costs are $170
a unit for the second scale of operations. Prepare a table similar to the
one below and complete with the given levels of output and the
relationships between quantity and fixed cost, quantity and variable
costs, and quantity and total costs. First
Scale of operations
scale of operations
What is the exact break-even
number of units sold for each scale of operations? Assume that ½ of the fixed costs
in each scale of operations is non-cash depreciation. What is the cash
flow generated by each scale of operations if 1,000 of units are sold? You have been asked to advise the
management of this company on which scale of production to use. Let
us assume that the management is uncertain on how many units they can
sell, but estimate it will be between 500 and 3,000 units during the
first year and progressively more after that. Please advise management
what you learned from the breakeven analysis and the tables that you
devised that should help them make up their minds. Give them pros and
cons for both alternatives.The management of a firm wants to introduce a new
product. The product will sell for $15.00 a unit and can be produced by
either of two scales of operation. Following are the total costs:First
scale of operation
TC = $20,000 + $10.00Q
scale of operation
TC = $40,000 + $5.00Q
are the anticipated levels of sales:
can management expect for profits or losses in years 1 and 2 if it selects the
scale of operations with lower fixed costs? On what grounds can management
justify selecting this scale of operation? If sales reach 5,000 a year, which
is the correct scale of operation?
You have been asked to rank the payback periods of
three investments for a business. They each cost $35,000.
the investments based on payback period. Would you rank them as investments in
that order? Why or why not? See the table above for the cash flows of each.
Given the following information answer the following
TC = $1,500 + $2Q
What is the break even level of output?If the firm sells 1,300 units, what are the firm’s
earnings or losses?If sales rise to 2,000 units, what are the firms
earnings or losses?What happens to the breakeven level of output units if
the total cost equation were: TC = $2,000 + $1.80Q
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