Question

In order to produce a new product, a firm must lease equipment at a cost of $48,000 per year. The managers feel that they can sell 9,500 units per year at a price of $33. What is the highest variable cost that will allow the firm to at least break even on this project? (Round your answer to 2 decimal places.

Answer 1

The firm must lease the equipment at a cost of $48,000.

The lease paid for equipment is a fixed cost.

So,

The fixed cost is $48,000.

The firm expects to sell 9,500 units at a price of $33 per unit.

Calculate the total revenue -

Total revenue = Price * Quantity

Total revenue = $33 * 9,500 = $313,500

The total revenue would be $313,500.

At breakeven, the total cost equals the total revenue.

So,

If total cost of firm is $313,500 then it would breakeven.

Total cost = Total fixed cost + Total variable cost

$313,500 = $48,000 + Total variable cost

Total variable cost = $313,500 - $48,000 = $265,500

Thus,

The highest variable cost that will allow the firm to atleast breakeven on this project is $265,500.