Question

George’s T-Shirt Shop produces 5,000 custom-printed T-shirts per month. George’s fixed costs are $15,000 per month. The marginal cost per T-shirt is a constant $4. What is his break-even price? What would be George’s break-even price if he were to sell 50 percent more shirts?

Answer 1

Breakeven occurs when Profit = TR - TC = 0 => TR = TC

where TR = Totao Revenue = P*Q, TC = Total Cost = FC + VC, P = Price of output that we have to find, FC = Fixed Cost 15000, Q = Quantity = 5000 and VC = Variable Cost. Here Marginal cost(MC) is constant, thus VC = MC*Q = 4Q.

So, TR = P*Q = 5000P and TC = FC + VC = 15000 + 4*5000 = 35000

So, TR = TC => 5000P = 35000 => P = 7

Hence, Initial Breakeven price = $7

Nw Q increases by 50% => New Quantity(Q) = 5000 + (50/100)*5000 = 7500

So, Now TR = 7500P and TC = FC + VC = 15000 + 4*7500 = 45000

So, TR = TC => 7500P = 45000 = $6.

Hence, New Breakeven price = $6