Question

A company has the following data:

• Revenue (Price x Quantity) = $750,000

• Variable cost per unit = $65

• Units sold (Quantity) = 5,000

• Total costs = $625,000

• The company has no semi-variable costs

The company will open a new branch that will increase its fixed costs by $125,000.

Determine the following:

a) Price of each unit.

b) Total variable cost.

c) Total fixed costs before the new branch.

d) Total fixed costs after the new branch.

e) Total costs after the new branch. f) Breakeven quantity after the new branch.

Answer 1

(a) Revenue = Price * Quantity

$750,000 = Price * (5000)

Price =( $750,000 / 5000)

Price = $150

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(b) Variable cost per unit = $65

Units sold (quantity) = 5000

Variable cost = $65 * 5000

Variable cost = $325000

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(c) Total cost = Total variable cost + Total fixed cost

$625000 = $325000 + Total fixed cost

Total fixed cost = $625000 - $325000

Total fixed cost = $300000

Total fixed costs before the new branch is $300000

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(d) The company will open a new branch that will increase its fixed costs by $125,000.

Total cost after the new branch = $300000 + $125000 = $425000

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(e) Total cost after the new branch = new total fixed cost + total variable cost.

Total cost after the new branch = $425000 + $325000 = $750000.

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(f) TC= TVC + TFC

TC = 65Q + $425000 (Total cost function)

TR = Price * Quantity

TR = 150 Q (Total revenue function)

At breakeven point; TR - TC = 0

=> TR = TC

150Q = 65Q + 425000

150 Q - 65 Q = 425000

85 Q = 425000

Q = 425000 / 85

Q = 5000

Breakeven quantity after the new branch is 5000.