Required:

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

Quantity

Total

Revenue

Variable

Costs

Fixed

Costs

Total

Costs

Profits

(Loss)

0

500

1,000

1,500

2,000

2,500

3,000

Second

scale of operations

Quantity

Total

Revenue

Variable

Costs

Fixed

Costs

Total

Costs

Profits

(Loss)

0

500

1,000

1,500

2,000

2,500

3,000

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

Second

scale of operation

TC = $40,000 + $5.00Q

Following

are the anticipated levels of sales:

Year

Unit

Sales

1

3,000

2

3,500

3

4,000

4

5,000

What

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.

Year

A

B

C

1

$10,000

$25,000

$12,500

2

$10,000

$10,000

$8,500

3

$10,000

$4,000

$6,000

4

$10,000

$500

$8,000

5

$10,000

0

$5,000

Rank

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

questions:TR

= $3Q

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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