Question

In: Economics

Tetrangle Manufacturing has fixed costs of $2,160 per day. The firm manufactures bicycle component upgrade kits....

Tetrangle Manufacturing has fixed costs of $2,160 per day. The firm manufactures bicycle component upgrade kits. The kits have a short-run average variable cost of $48 and are sold for $66 each.

a). What is the breakeven level of daily output for the firm?

b). What quantity should Tetrangle produce if it wants to make a profit of $700?


c). What is the degree of operating leverage when daily output is Q = 200?


Solutions

Expert Solution

a) Breakeven output = Fixed cost/(Selling price-average variable cost)

=2160/(66-48)

=2160/18

=120

b) Let the units sold be X

Profit = (P-ATC)*Q

66X-2160+48X=700

18X=700+2160

X=2860/18 = 158.8 or 159

c) When Q=200

TC=2160+48*200 = 11760

SC=66*200=13200

Degree of operating leverage = 13200-11760 = 1440

Rahul Sunny answered 2 years ago
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