Question

The Retread Tire Company recaps tires. The fixed annual cost of the recapping operation is $65,000. The variable cost of recapping a tire is $7.5. The company charges$25 to recap a tire.
a. For an annual volume of 15, 000 tire, determine the total cost, total revenue, and profit. b. Determine the annual break-even volume for the Retread Tire Company operation.

Answer 1

Part a) Total Cost

Total Cost for recapping the tires is the sum of fixed cost and the variable cost. i.e.

The total cost is ( $65,000 fixed) + (15,000 x $7.5)

=$65,000+$112,500

=$177,500  

Part b) Total Revenue

Revenue from 1 tire = $25

Total tires recapped = 15000

So, Total revenue = 15000 tires x $25/tire

Total Revenue =$375,000  

Part c) Total Profit

Total Profit = Revenue - Cost

Using the above values, we get:

Profit = $375,000 - $177,500

Profit = $197,500  

Part d) Break-even Point

Break-even point point occurs where the cost and the revenue of the company are equal. Let the break-even point occurs at x-tires. We can write:

For break-even point

Cost of recapping x tires = Revenue from x tires

65,000 + 7.5 x = 25x

65,000 = 17.5 x

x = 3714 tires

Thus, on recapping 3714 tires, the cost will be equal to the revenue generating 0 profit. This is the break-even point.