| Breakeven Analysis | |||||||||||||||
| Management believes it can sell a new product for $250. | |||||||||||||||
| First Scale of Operations: fixed costs of production are estimated to be $50,000 and the variable costs are $215 a unit | |||||||||||||||
| Second Scale of Operations: fixed costs of production are estimated to be at $150,000 and variable costs are $170 a unit | |||||||||||||||
| a. Complete the tables below for each scale of operations with the given levels of output and the relationships | |||||||||||||||
| between quantity and fixed cost, quantity and variable costs, and quantity and total costs. | |||||||||||||||
| First Scale of Operations | |||||||||||||||
| Total Revenue | Variable Costs | Fixed Costs | Total Costs | Profit / | |||||||||||
| Quantity | (Loss) | ||||||||||||||
| 0 | |||||||||||||||
| 500 | |||||||||||||||
| 1,000 | |||||||||||||||
| 1,500 | |||||||||||||||
| 2,000 | |||||||||||||||
| 2,500 | |||||||||||||||
| 3,000 | |||||||||||||||
| Second Scale of Operations | |||||||||||||||
| Total Revenue | Variable Costs | Fixed Costs | Total Costs | Profit / | |||||||||||
| Quantity | (Loss) | ||||||||||||||
| 0 | |||||||||||||||
| 500 | |||||||||||||||
| 1,000 | |||||||||||||||
| 1,500 | |||||||||||||||
| 2,000 | |||||||||||||||
| 2,500 | |||||||||||||||
| 3,000 | |||||||||||||||
| b. What is the breakeven number of units sold for each scale of operations? Note that partial units cannot be produced. | |||||||||||||||
| c. Assume that ½ of the fixed costs in each scale of operations is non-cash depreciation. What is the cash flow | |||||||||||||||
| generated by each scale of operations if 1,000 of units are sold? | |||||||||||||||
| d. Based on the results calculated in the tables for each scale of operations and the breakeven units calculations, what effect does the mixture of fixed and | |||||||||||||||
| variable costs have on a firm’s operating earnings? | |||||||||||||||
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