Question

A firm has the capacity to produce 1,000,000 units of a product each year. At present, it is operating at 70 percent of capacity. The firm’s annual revenue is $700,000. Annual fixed costs are $300,000, and the variable costs are $0.50 per unit
a. What is the firm's annual profit or loss?
b. What is the price for each unit?
c. At what volume of sales (quantity) does the firm break even?

Answer 1

Answer:

a. The firm's annual profit is $50,000

b. The price for each unit is $1 per unit

c. The volume of sales (quantity) the firm breaks even: $600,000 (600,000 units)

Explanation:

The firm operates at 70 percent of capacity. The number of units the firm produces: 1,000,000 x 70% = 700,000 units

Total variable costs = Variable costs per unit x 700,000 units = $0.50 x 700,000 = $350,000

Net income = Revenue - Total variable costs - Total fixed costs = $700,000 - $350,000 - $300,000 = $50,000 >0

The firm's annual profit is $50,000

The price for each unit =  Revenue/ number of units sold (produced) = $700,000/700,000 = $1 per unit

The break-even point is calculated by using following formula:

Break-even point in units = Fixed cost/(Selling price per unit-Variable costs per unit) =  $300,000/($1-$0.50) = 600,000 units

Sales at the firm breaks even = 600,000 x $1 = $600,000