Question

Fred is thinking of entering the soft drinks market in the area surrounding his cottage. he is going to call his company "pop's pop". he realizes that the soft drink industry is dominated by only three companies that keep the competition out by spending a great deal on advertising. nonetheless, fred is tempted by the high profit margin. he plans to sell his cola for a dollar per bottle. variable costs are $0.20 per bottle. his fixed costs are estimated at $100,000. he currently has the capacity to make and sell 200,000 bottles in a summer. in order to justify spending his time on this venture, rather than sitting on his dock, fred needs to have an operating income of $15,000. what is fred's break even in units?

Answer 1

To calculate Fred's break-even point in units, we need to determine the quantity at which the revenue equals the total cost. By dividing the total cost by the selling price, we find that Fred's break-even point is 140,000 units.

Step-by-step explanation:

To calculate the break-even point, Fred needs to cover his fixed costs and reach his desired operating income. The operating income is the difference between the revenue and the total cost.

Let's calculate the total cost:

1. Fixed costs: $100,000
2. Variable costs per unit: $0.20
3. Total variable costs: $0.20 * 200,000 = $40,000

The total cost is the sum of the fixed costs and the total variable costs: $100,000 + $40,000 = $140,000.

To determine the break-even point, we need to find the quantity at which the revenue equals the total cost. Let's denote the quantity as 'Q' and the revenue as 'R':

R = Q * $1 = $Q

At the break-even point, the revenue equals the total cost:

$Q = $140,000

To find 'Q', we can divide both sides of the equation by the selling price:

Q = $140,000 / $1

So, the break-even point for Fred in units is 140,000 units.