Question

In: Finance

Bucky wants to monopolize the local lemonade market. He is pretty sure he can sell at least 500 cups. Bucky needs to know what is the lowest price he can charge and breakeven on the 500 units.

Bucky wants to monopolize the local lemonade market. He is pretty sure he can sell at least 500 cups. Bucky needs to know what is the lowest price he can charge and breakeven on the 500 units. Knowing this price will help Bucky know if he can survive while driving his competitors out of the market. What is the price Bucky can charge to breakeven on 500 units?

Solutions

Expert Solution

• Business break-even gross profit margin / fixed costs

Suppose a company is engaged in making cups. The cost for manufacturing 1 cup is as below:

Direct Labor ₹5
Materials ₹2
Manufacture  ₹3

Hence, the break-even price to recover costs for company is ₹10 per widget.

 

Now suppose that company becomes ambitious and is interested in making 500 such cups. To do so, it will have to scale operations and make significant capital investments in factories and labor. The firm invests *20000 in fixed costs, including building a factory and buying machines for manufacturing.

The firm's break-even price for each cup can be calculated as follows:

• (Fixed costs) / (number of units) + price per unit or 20000 / 500+ 10 = 50

₹50 is the break-even price for the firm to manufacture 500 cups.


₹50 is the break-even price for the firm to manufacture 500 cups.

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