Question

A company has decided to manufacture a part that sells for $90. This will require an initial investment of $65,000 and variable costs of $14 per part. If the company sells 789 parts this year what will be their profit.

Answer 1

The fixed cost is the cost of initial investment which equals $65,000. The variable cost is the cost which varies with output produced. The variable cost of producing 789 units is (789)(14) = $11,046. The total cost is the sum of fixed cost and variable cost. So, the total cost of producing 789 units is $65,000 + $11,046 which equals $76,046.

The total revenue is calculated by multiplying the price and quantity sold. So, the total revenue from selling 789 units is (90)(789) = $71,010.

The profit is the amount by which the total revenue exceeds total cost. So,

Profit = $71,010 - $76,046 = - 5,036.

So, the firm will incur a loss of $5,036.