Question

Break-even production of a firm is 4,000 units, its total fixed cost is Rs. 40,000 and the variable cost per unit is Rs. 20.
(a) Find out the price of the product.
(b) What should be the firm’s output to earn profit contribution of Rs. 20,000?

Answer 1

To break-even production total unit to be produced = 4000
Total Fixed cost= Rs 40000
Fixed cost per unit= 40000/4000= Rs 10
Variable cost is Rs 20.
Hence price of product for first 4000 unit is 10+20=Rs 30
For subsequent production cost of product = variable cost
Hence profit is 30-20= Rs10
To make Rs 20000 profit 20000/10= 2000 product additionally have to be made.
Firm's output should be 2000+4000=6000 units