Question

A company manufactures and sells novelty mugs. The manufacturing costs consists of a fixed cost of R8000 AND A VARIABLE COST OF R15.00 per mug. The mugs are sold at R35 each. Assume a linear profit function.

1. Determine the profit function.
2. What is the break-even level.
3. Draw a graph depicting a profit function.

Answer 1

Given:
Manufacturing cost : fixed cost = 8,000 ; variable cost = 15 per mug
Selling Price: 35 per mug

Let x be the number of mugs.

Sales Revenue = 35x
Manufacturing Cost = 8,000 + 15x

Profit = Sales Revenue - Manufacturing Cost
P = 35x - 8,000 - 15x
P = 20x - 8,000

Break even level: Profit is 0
Sales Revenue = Manufacturing cost
35x = 8,000 + 15x
35x - 15x = 8000
20x = 8000
x = 8000/20
x = 400

Company must produce at least 400 mugs to break even or have 0 profit. Quantity greater than 400 will result to a profit while quantity lesser than 400 will result to a loss.