Question

1. A product is currently made by a firm to supply the market, where fixed costs are $8,000 per month and variable cost is $50 per unit. The firm sells the product for $100 per unit.
   

1. What is the break-even point in units for this operation? (5 points)

2. At the break-even production level calculated above, what is the profit or loss? (5 points)

3. What is the profit (or loss) if the market demand is 140 units for a certain month and the firm produces 140 units to satisfy the demand? (5 points)

4. Will the firm continue to produce to supply the 140-unit market demand in a short term? Why? (5 points)

Answer 1

Let the break even point be X, then

Total Expense = Total Revenue

8000 + 50*X = 100*X

50*X = 8000

X = 160 Units

At the break even volume

The expense = 8000 + 50*160

= $16000

Total Revenue = 100*16

= $16000

Therefore as the expense and the revenue is equal, there is no profit or loss.

If the volume is 140 Units

Total Expense = 8000 + 50*140

= $15000

Total Revenue = 100*140

= $14000

There is a loss of $1000 as the revenue is lower than the expense

No, the firm should continue the 140 unit demand as it will make the organization incur loss in this context accordingly.