Answer to Question #207855 in Macroeconomics for Carlin

Question

For Toucan industries, the following relationships exists: each unit of output is sold for $35, the fixed costs are $160,000 and variable cost are $15 per unit.

A)  What is the firm’s gain or loss at sales of 6000 units and 9000 units?

 

B)   What is the break-even point? (Illustrate by means of a chart/graph)

 

 

C)   What is toucan’s degree of operating leverage at sales of 6000 units and 9000 units?

 

D)  What happens to the break-even point if the selling price rises to $40? What is the significance of the change to financial management? (Illustrate by means of a chart)

 

 

E)   What happens to the break-even point if the selling price rises to $40 but variable costs rise to $20 per unit?

Answer 1

(a)At sales of 6000 units:

profit= total revenue - total cost

=$(6000\times35)-(160000+(15\times6000))$

=$-40000$

$\implies$loss of $40,000

At sales of 9000 units

profit= total revenue - total cost

$=(9000\times 35)-(160000+(15\times9000))$

$=20,000$

$\implies$ profit of $20,000

(b) The break even point is the price point where marginal cost curve intersects average total cost curve.

$break even point=\frac{fixed costs}{total revenue-variable cost}$

=$\frac {160,000}{315,000-135,000}$

$=0.89$

(c) Degree of operating leverages

at 6,000 units

$= \frac {sales-variable costs}{sales-variable costs -fixed costs}$

$= \frac {(6000\times35)-(6000\times15)}{(6000\times35)-(6000\times15)-160,000)}$

=-3

at 9000 units

$=\frac {(9000\times35)-(9000\times15)}{(9000\times35)-(9000\times15)-160,000}$

=9.

(d) if selling price rises to 40

$BEP= \frac{160,000}{(9000\times40)-135,000}$

= 0.71

BEP falls from 0.89 to 0.71

The decrease in BEP implies that there is a fall in the proportion of contribution margin products that are sold.

(e)

$BEP=\frac {160,000}{(9000\times40)-(9000\times20)}$

=0.89

break even point is raised back to the initial point 0.89.