13. A defense contractor has been able to summarize its total annual fixed costs as
$100,000 and the total variable cost per unit of production as $33.
a. If only 5000 units is all that is expected to sell to the government this year what
should the per unit selling price be to make a %25 profit this year?
b. If foreign sales of 3000 units per year is to be added to the 5000 units government
contract above and a %25 profit is acceptable for this contractor again, what could
be the new selling price per unit?
Answers
Answer:
Breakeven analysis is performed to determine the value of a variable of a project that makestwo elements equal, e.g. sales volume that will equate revenues and costs.Single ProjectThe analysis is based on the relationship:Profit = revenue – total cost= R – TCAt breakeven,there is no profit or loss, hence,revenue = total costor,R = TCNote: It is to be noted that +ve sign is used for both the revenue and the costs. If we are to use–ve sign for costs and +ve sign for revenue, then the above relationships become:Profit = R + TCandR + TC = 0at breakeven.With revenue and costs given in terms of a decision variable, the solution yields thebreakeven quantity for the decision variable.Costs, which may be linear or non-linear, usually include two components:Fixed costs (FC)– Includes costs such as buildings, insurance, fixed overhead, equipmentcapital recovery, etc. These costs are essentially constant for all values of the decisionvariable.Variable costs (VC)– Includes costs such as direct labour, materials, contractors, marketing,advertisement, etc. These costs change linearly or non-linearly with the decision variable, e.g.production level, workforce size, etc. For the analysis to be followed here, the variation willgenerally be assumed to be linear.Then, total cost,TC = FC + VCRevenue also changes with the decision variable. Again, for the analysis, the variation willgenerally be assumed to be linear.The following diagram illustrates the basics of the breakeven analysis.Revenue, RRevenueTotal Cost, TCorCostVCFCQBE, Breakeven quantityProduction, Q units/yearIt can be seen that we have profit if the production level is above the breakeven quantity andloss if it is below.1
Step-by-step explanation: