Given Information:
Rent = $20,000,000
Materials and Wages = $10,000/tractor
Number of tractors = 2,000
Amount spent on R&D = $3 million
Required Information:
Lowest price to sell a tractor = ?
Answer:
Lowest price to sell a tractor = at least $20,000
Calculations & Explanation:
The company needs to sell at least at a price that all of its manufacturing cost can be recovered without the profit margin.
This happens at a break-even point where total revenue equals the total manufacturing cost.
Total manufacturing cost = Total revenue
The revenue is number of tractors multiplied by some price x
Total revenue = 2,000*x
Total manufacturing cost = fixed cost + Variable cost
Total manufacturing cost = 20,000,000 + 2,000(10,000)
Total manufacturing cost = 20,000,000 + 20,000,000
Total manufacturing cost = 40,000,000
so,
Total manufacturing cost = Total revenue
40,000,000 = 2,000*x
x = 40,000,000/2,000
x = $20,000
Therefore, the lowest price to sell each tractor should be atleast $20,000
Note: The R&D cost is not usually included in such scenarios because R&D cost is sunk and should not be added in these calculations.
