Question

If a soup kitchen has marginal revenues of $3.00 per meal delivered, marginal expenses of $4.00 per meal, $50,000 of annual fixed costs and annual donations of $150,000, it will...

Select one:

a. never reach its break-even quantity.

b. need additional donations of $1 per meal to reach its break-even quantity.

c. reach its break-even quantity when it serves 100,000 meals.

Answer 1

Answer: Option (C) | Explanation and Calculation is given below.

The Breakeven point means a state of no profit no loss and/or where all the costs have been covered.

Now, let us analyse this case.

Marginal Revenue per meal = $3

Marginal Cost per meal = $4

Marginal Profit per meal = Revenue - Cost = $3 - $4

Marginal Profit per meal = - $1

The breakeven point in this case can be calculated as :

Donation + Total Revenues - Total Costs = 0

Donation + (Total Revenues - Total Variable Cost) - Total Fixed Cost = 0

Donation + Total Marginal Profit - Total Fixed Cost = 0 .........Equation A

Here we know,

Donation = $ 150,000 .... given

Total Fixed Cost = $ 50,000 .... given

Marginal profit per meal = - 1$

Let us assume, that the soup kitchen reaches the breakeven point after selling 'A' meals. Then,

Total Marginal Profit = A x - $1 = - $A

Hence, using Equation A as given above

150,000 + (- A) - 50,000 = 0

100,000 - A = 0

A = 100,000

Hence, the correct option is (C) that the soup kitchen will reach the break even quantity when it serves 100,000 meals.