Question

A farm equipment manufacturer has already spent $3 million in research and development to design a new model of tractor. To produce the tractors, the company will have to contract to rent a factory for a year at a cost of $20 million, and will then spend an additional $10,000 per tractor in materials and wages. The company estimates that it can sell 2,000 tractors per year at a certain price, and concludes that it should produce the tractors. What is the lowest price the company could be using in this calculation?

Answer 1

Answer:

$20,000

Explanation:

Data provided in the question:

Amount spent on research and development = $3 million

Rent = $20 million = $20,000,000

Materials and wages = $10,000 per tractor

Number of tractors to be sold = 2,000

Now,

The lowest price will be when the company attains the break-even

thus,

At break-even point

Total cost = Total revenue

let the lowest cost be 'x'

therefore,

2,000x = $20,000,000 + ( $10,000 × 2,000 )

or

2,000x = $20,000,000 + $20,000,000

or

2,000x = $40,000,000

or

x = $20,000