1 20 points EmKay Electricals operates a factory that has fi

1) (20 points) EmKay Electricals operates a factory that has fixed costs of $2,000,000 per year. The output capacity (maximum it can produce) of the factory is 100,000 electrical appliances per year. The variable cost is $50 per unit, and the electrical appliance sells for $90 per unit. Answer the following questions (Ignore the time value of money. a) (12 points) Determine the number of units that the factory must produce and sell per year in order to breakeven. Express this breakeven production volume as a percentage of the output capacity. b) (8 points) when the factory is operating at 80% of output capacity, what is the annual profit or loss expected?

Solution

ANSWER:

A) Fixed costs = $2,000,000

maximum output capacity = 100,000

variable costs = $50 per unit

selling price = $90 per unit

breakeven point = fixed costs / ( selling price per unit - variable cost per unit )

breakeven point = 2,000,000 / ( 90 - 50)

breakeven point = 2,000,000 / 40 = 50,000

so the no of breakeven points is 50,000

% of total output capacity = (no of breakeven units / maximum output capacity) * 100 = (50,000 / 100,000) * 100 = 0.5 * 100 = 50%

b) if factory operates at 80% output capacity , the no of units produced will be = 80% * maxiimum storage capacity = 80% * 100,000 = 80,000

total revenue = no of units produced * selling price per unit = 80,000 * 90 = $7,200,000

total cost = fixed cost + variable cost * no of units = $2,000,000 + $50 * 80,000 = $2,000,000 + $4,000,000 = $6,000,000

annual profit = total revenue - total cost = $7,200,000 - $6,000,000 = $1,200,000