A plant has annual fixed costs of 100000 Variable costs are

A plant has annual fixed costs of $100,000. Variable costs are $40,000 per year at 80% production capacity; annual revenues are $70,000 at this capacity. The selling price per unit is $35. a. At 80% capacity, what are annual sales in number of units? b. What is the variable cost per unit? c. What is the breakeven quantity?

Solution

a)annual sales =annual revenue/selling price per unit

Annual sales =70000/35=2000unit

b) Variable cost per unit =total variable cost/annual sales

Variable cost per unit = 40000/2000=$20

C) At breakeven quantity the plant will cover all the cost including fixed cost and variable cost at breakeven quantity firm earns normal profit (which means no profit and no loss)

At breakeven quantity total revenue=total fixed cost+total variable cost

To calculate break even quantity let’s assume breakeven quantity be x

100000=total fixed cost

20x=total variable cost

35x=total revenue

100000+20x=35x equation (1)

From equation 1

15x=100000 equation (2)

From equation 2

x=100000/15=6666.66 units