Question

1.

Fill in the Blanks

Your firm pays $3,000 per month in fixed costs. You also pay $15 per unit to produce your product. What is your total cost if you produce 1,000 units?

What if you produce 5,000 units?

2.

The Motor Works is considering an expansion project with estimated fixed costs of $127,000, depreciation of $16,900, variable costs per unit of $41.08, and an estimated sales price of $79.90 per unit. How many units must the firm sell to break even on a cash basis?

Answer 1

Solution to PART-1

Total cost for producing 1,000 units

Total cost for producing 1,000 units = Total variable cost + Total fixed costs

= [1,000 units x $15 per unit] + $3,000

= $15,000 + $3,000

= $18,000

Total cost for producing 5,000 units

Total cost for producing 5,000 units = Total variable cost + Total fixed costs

= [5,000 units x $15 per unit] + $3,000

= $75,000 + $3,000

= $78,000

Solution to PART-2

Number of units that the firm sell to break even on a cash basis = Total Fixed costs / Contribution per unit

= Total fixed costs / [Selling price per unit – Variable cost per unit]

= $127,000 / [$79.90 per unit - $41.08 per unit]

= $127,000 / $38.82 per unit

= 3,272 units