Question

Problem 19-01

Management believes it can sell a new product for $8.50. The fixed costs of production are estimated to be $5,500, and the variable costs are $3.50 a unit.

1. Complete the following table at the given levels of output and the relationships between quantity and fixed costs, quantity and variable costs, and quantity and total costs. Round your answers to the nearest dollar. Enter zero if necessary. Use a minus sign to enter losses, if any.

   Quantity		Total Revenue	Variable Costs	Fixed Costs	Total Costs	Profits (Losses)
   0		$	$	$	$	$
   500		$	$	$	$	$
   1,000		$	$	$	$	$
   1,500		$	$	$	$	$
   2,000		$	$	$	$	$
   2,500		$	$	$	$	$
   3,000		$	$	$	$	$

2. Determine the break-even level using the above table and use the Exhibit 19.5 to confirm the break-even level of output. Round your answers for the break-even level to the nearest whole number. Round your answers for the fixed costs, variable costs, total costs, and profits (losses) to the nearest dollar. Enter zero if necessary. Use a minus sign to enter losses, if any.

   Quantity	Total Revenue	Variable Costs	Fixed Costs	Total Costs	Profits (Losses)
   	$	$	$	$	$

3. What would happen to the total revenue schedule, the total cost schedule, and the break-even level of output if management determined that fixed costs would be $7,500 instead of $5,500? Round your answer for the break-even level of output to the nearest whole number.

   If fixed costs were $7,500 instead of $5,500 the total revenue schedule does not change and the total cost schedule increases.

   The new break-even level of output is   units.

Answer 1

Ans.

a)

Quantity	Total Revenue	Variable Costs	Fixed Costs	Total Costs	Profits (Losses)
0	$                   -	$                      -	$    5,500.00	$      5,500.00	$ (5,500.00)
500	$       4,250.00	$          1,750.00	$    5,500.00	$      7,250.00	$ (3,000.00)
1,000	$       8,500.00	$          3,500.00	$    5,500.00	$      9,000.00	$     (500.00)
1,500	$    12,750.00	$          5,250.00	$    5,500.00	$    10,750.00	$   2,000.00
2,000	$    17,000.00	$          7,000.00	$    5,500.00	$    12,500.00	$   4,500.00
2,500	$    21,250.00	$          8,750.00	$    5,500.00	$    14,250.00	$   7,000.00
3,000	$    25,500.00	$        10,500.00	$    5,500.00	$    16,000.00	$   9,500.00

b)

Accordng to above calculations , we get that upto units 1,000 loss incur. So to earn profit we have to cover the loss of $ 500.

And this loss is covered by manufacturing only 100 units more as the contribution margin is $5 ( 8.5 - 3.5)

So the Break Even level output is achieved by manufacturing 1,100 units.

Also we can calculate this by applying formula as

Break Even level of output = Fixed Cost / Selling Price - Variable Cost = $ 5,500 / $ 8.5 - $ 3.5 = 1,100 units.

c)

Quantity	Total Revenue	Variable Costs	Fixed Costs	Total Costs	Profits (Losses)
0	$                   -	$                      -	$    7,500.00	$      7,500.00	$ (7,500.00)
500	$       4,250.00	$          1,750.00	$    7,500.00	$      9,250.00	$ (5,000.00)
1,000	$       8,500.00	$          3,500.00	$    7,500.00	$    11,000.00	$ (2,500.00)
1,500	$    12,750.00	$          5,250.00	$    7,500.00	$    12,750.00	$               -
2,000	$    17,000.00	$          7,000.00	$    7,500.00	$    14,500.00	$   2,500.00
2,500	$    21,250.00	$          8,750.00	$    7,500.00	$    16,250.00	$   5,000.00
3,000	$    25,500.00	$        10,500.00	$    7,500.00	$    18,000.00	$   7,500.00

According to the above table we get that when we produce 1,500 units , there will be no loss and no profit

So the Break even level of output = 1,500 units

Also we can calculate this by applying formula as

Break Even level of output = Fixed Cost / Selling Price - Variable Cost = $ 7,500 / $ 8.5 - $ 3.5 = 1,500 units.