Question

For a manufacturing company, selling price for an item is $500 per Unit, Variable cost is $50 per Unit, rent is $5000 per month and insurance is $3000 per month. Company wants to expand their business, selling price for the item will increase to $800 per Unit, Variable cost to $80 per Unit, new area will have rent $8000 per month and insurance is $5000 per month. At what point will the company be indifferent between current mode of operation and the new option?

Answer 1

Answer:

indifference point: 18.52 as it cannot sale half unit it is between 18 and 19 units.

Explanation:

We want to know at which level of sales both alternatives yield the same income:

the income function is: (sales price - variable cost ) Q - fixed cost

(500 - 50)x - 8,000 = (800-80)x - 13,000

13,000 - 8,000 = (720 - 450)X

5,000 = 270X

X = 5,000 / 270 = 18,5185 = 18.52

The indifference point will be between 18 and 19 units. as it cannot sale half units.