Question

1. A factory produces a small electronic gadget. If the factory has fixed monthly overheads of AED 5000 and the variable cost is AED 15 per unit.     The selling price for each unit is AED 20. If the factory produces 500 units. If the factory is losing money what is the amount that will make the factory have zero loss?

Answer 1

Form the above question we have following information

Variable cost = 15 per unit

Fixed cost = 5000

Selling Price = 20

Now we have to find the number of units on which there will be no loss

So when total revenue and total cost will become equal then losses will also be zero

TR < TC (losses)

TR = TC (zero losses and zero profit)

TR > TC (Profit)

Now from the above information, we can make total cost equation and total revenue equation

TC = Fixed cost + Variable cost

TC = 5000 + 15Q

TR = Price x Q

TR = TC (zero losses and zero profit)

Price x Q = 5000 + 15Q

20 x Q = 5000 + 15Q

20Q = 5000 + 15Q

20Q - 15Q = 5000

5Q = 5000

Q = 5000 / 5

Q = 1000

Hence on 1000 units, losses will be zero we can check by in putting this value in TR and TC equation

Price x Q = 5000 + 15Q

20(1000) = 5000 + 15(1000)

20000 = 5000 +15000

20000 = 20000

So at 1000 units - zero profit and zero loss

quantity more than 1000 units - Profit

quantity less than 1000 units - Loss