Question

The management of a firm wants to introduce a new product. The product will sell for $4 a unit and can be produced by either of two scales of operation. In the first, total costs are

TC = $4,000 + $2.6Q.

In the second scale of operation, total costs are

TC = $6,520 + $2.0Q.

What is the break-even level of output for each scale of operation? Round your answers to the nearest whole number.

The first scale of operation: units The second scale of operation: units What will be the firm’s profits for each scale of operation if sales reach 4,200 units? Round your answers to the nearest dollar.

The first scale of operation: $

The second scale of operation:$

One-half of the fixed costs are noncash (depreciation). All other expenses are for cash. If sales are 2,600 units, will cash receipts cover cash expenses for each scale of operation? Enter your answers as positive values. Round your answers to the nearest dollar.

The first scale of operation generates a cash flow of $ .

The second scale of operation generates a cash flow of $ .

The anticipated levels of sales are the following:

Year Unit Sales 1 3,200 2 4,200 3 5,200 4 6,200

If management selects the scale of production with higher fixed cost, what can it expect in years 1 and 2? Round your answers to the nearest dollar.

Earnings in year 1: $

Earnings in year 2: $

If the firm selects the scale with higher fixed costs, its earnings in year 1 will be earnings in year 2. If sales reach only 4,200 a year, was the correct scale of operation chosen? Be sure to consider all the factors. should have been preferred.

Answer 1

The management of a firm wants to introduce a new product. The product will sell for $4 a unit and can be produced by either of two scales of operation. In the first, total costs are

TC = $4,000 + $2.6Q.

In the second scale of operation, total costs are

TC = $6,520 + $2.0Q.

What is the break-even level of output for each scale of operation? Round your answers to the nearest whole number.

Answer: Break even is when the profit is zero or total cost is equal to total revenue. Pls see table below for results

	First Scale	Second Scale
Revenue	4Q	4Q
Cost	4000 + 2.6*Q	6520 + 2 * Q
Profit	1.4Q - 4000	2Q - 6520
Revenue - Cost
Solving for Q if Profit = 0
Q	2,857	3,260
	4000 / 1.4	6520 / 2

The first scale of operation: units The second scale of operation: units What will be the firm’s profits for each scale of operation if sales reach 4,200 units? Round your answers to the nearest dollar.

The first scale of operation: $

The second scale of operation:$

Answer: We can calculate the profits for each scale of operation for Q=4200 in the table below

	First Scale	Second Scale
Revenue	16800	16800
Cost	14920	14920
Profit	1880	1880

One-half of the fixed costs are noncash (depreciation). All other expenses are for cash. If sales are 2,600 units, will cash receipts cover cash expenses for each scale of operation? Enter your answers as positive values. Round your answers to the nearest dollar.

The first scale of operation generates a cash flow of $ .

The second scale of operation generates a cash flow of $ .

Answer: Pls see the table below for the calculations

	First Scale	Second Scale
Revenue	10400	10400
Cost	14920	14920
Depreciation (1/2 of fixed cost)	2000	3260
Cash Profit	-2520	-1260
	Revenue - Cost + Dpreciation

The anticipated levels of sales are the following:

Year Unit Sales 1 3,200 2 4,200 3 5,200 4 6,200

If management selects the scale of production with higher fixed cost, what can it expect in years 1 and 2? Round your answers to the nearest dollar.

Earnings in year 1: $

Earnings in year 2: $

If the firm selects the scale with higher fixed costs, its earnings in year 1 will be earnings in year 2. If sales reach only 4,200 a year, was the correct scale of operation chosen? Be sure to consider all the factors. should have been preferred.

Answer: Let's see the calculations in the table below. If sales stay at year 1 level then the company will make losses not only in year 1 but in year 2 as well. We need to see what the profit would have been if the lower scale was chosen, for which pls see the second table below. As seen the company woudl make profits if sales stay at 3200 level with lower scale of operations. On the other hand, we can see clearly that once the scale of operations goes beyond 4200 (the level at which both scales provide the same profit of 1880) it is more profitable to have larger scale.

	First year	Second year	Third year	Fourth year
Q	3200	4200	5200	6200
Revenue	12800	16800	20800	24800	4Q
Cost	12920	14920	16920	18920	6520 + 2Q
Profit	-120	1880	3880	5880	Revenue - Cost

	First year	Second year	Third year	Fourth year
Q	3200	4200	5200	6200
Revenue	12800	16800	20800	24800	4Q
Cost	12320	14920	17520	20120	4000 + 2.6Q
Profit	480	1880	3280	4680	Revenue - Cost
Revenue - Cost