Xacc/280 Week 9 Final Paper

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1. Management believes it can sell a new product for $250. The fixed costs of production are estimated to be $50,000 and the variable costs are $215 a unit for the first scale of operations. The fixed costs of production are estimated to be at $150,000 and variable costs are $170 a unit for the second scale of operations. a. Prepare a table similar to the one below and complete with the given levels of output and the relationships between quantity and fixed cost, quantity and variable costs, and quantity and total costs. First Scale of operations Quantity | Total Revenue | Variable Costs | Fixed Costs | Total Costs | Profits (Loss) | 0 | $0 | $0 | $50,000 | $50,000 | ($50,000) | 500 | $125,000 | $107,500 | $50,000 | $157,500 |…show more content…
What is the exact break-even number of units sold for each scale of operations? For the first scale of operations the break-even point is 1428.57=50,000/35. For the second scale of operations break-even point is 1875=150,000/80. c. Assume that ½ of the fixed costs in each scale of operations is non-cash depreciation. What is the cash flow generated by each scale of operations if 1,000 of units are sold? For the first scale of operations the cash flow generated if 1,000 units are sold at half the fixed costs is 10,000= 250,000-(25,000+215,000). The second scale of operations for the cash flow generated if 1,000 units are sold at half the fixed costs is 5,000=(75,000+170,000) d. You have been asked to advise the management of this company on which scale of production to use. Let us assume that the management is uncertain on how many units they can sell, but estimate it will be between 500 and 3,000 units during the first year and progressively more after that. Please advise management what you learned from the breakeven analysis and the tables that you devised that should help them make up their minds. Give them pros and cons for both…show more content…
Would you rank them as investments in that order? Why or why not? See the table above for the cash flows of each. No you would not rank the investments based on payback period in “that order” (A,B,C.). You would want to rank the investments based on payback period it the order (A,C,B.) because A=$15,000 in returns over 5 years C=$5,000 in returns over 5 years B=$4,500 in return over 5 years. 4. Given the following information answer the following questions: TR = $3Q TC = $1,500 + $2Q a. What is the break even level of output? The break even level of output is 1,500 units b. If the firm sells 1,300 units, what are the firm's earnings or losses? If the firm sells 1,300 units at $3 a unit there earnings/losses would be -$200 because total cost equals $4,100 and total revenue is $3,900 for units sold. c. If sales rise to 2,000 units, what are the firms earnings or losses? If sales rise to 2,000 units at $3 per unit the firms earnings would be $500 based on total revenue $6,000 minus total cost $5,500 equaling $500 for units sold. d. What happens to the breakeven level of output units if the total cost equation were: TC = $2,000 + $1.80Q The break even level of output becomes 1666.67 if the TC = $2,000 + $1.80Q and the

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