Question

In order to produce a new product, a firm must lease new equipment. The managers feel that they can sell 10,000 units per year at a price of $7.50. If the variable cost of production is $5.00 per unit, what is the most the firm can spend to lease the new equipment without losing money?

Answer 1

The most the firm can spend to lease the new equipment without losing money=$75,000

Step-by-step explanation:

The point at which the revenue in terms of sales equals the cost is the break-even point. This can be expressed as;

R=C

where;

R=revenue from sales

C=cost

And;

R=P×N

where;

R=revenue from sales

P=price per unit

N=number of units

In our case;

P=$7.5 per unit

N=10,000 units

replacing;

R=7.5×10,000=$75,000

Total revenue from sales=$75,000

C=p×n

where;

p=cost per unit

n=number of units

In our case;

p=$5

n=unknown

replacing;

C=5×n=5 n

At break-even point, R=C;

5 n=75,000

n=75,000/5=15,000

The break-even cost=5×15,000=$75,000

The most the firm can spend to lease the new equipment without losing money=$75,000