2. In its first year, “ABOL BUNA” Company had the following experience.
Sales = 25,000 units Selling price = Birr 100
Total variable cost = Birr 1,500,000 TFC = Birr 350,000
Required:
a) Develop revenues, cost, and profit functions for the company in terms of quantity.
b) Find the break-even point in terms of quantity.
c) Convert the cost equation in terms of quantity in to a cost equation in terms of revenue.
d) Find the break-even revenue.
e) If profit had been Birr 500,000 what would have been the sales volume (revenue) and the quantity of sales.
f) What would have been the profit if sales were Birr 2,000,000?
3. A retail co plans to work on a margin of 44% of retail price and to incur other variable costs of 4%. If it expects fixed cost of Birr 20,000,
Answer
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2 b
a) To develop the revenues, cost, and profit functions for the company in terms of quantity, we need to know the relationship between quantity and the various variables.
1. Revenue function:
Revenue = Selling price * Quantity
In this case, the selling price is Birr 100, and the quantity is a variable.
2. Total variable cost (TVC) function:
TVC = Total variable cost per unit * Quantity
The total variable cost is given as Birr 1,500,000, and the quantity is a variable.
3. Total fixed cost (TFC) is given as Birr 350,000 and does not change with the quantity.
4. Profit function:
Profit = Revenue - Total variable cost - Total fixed cost
b) To find the break-even point in terms of quantity, we need to know the quantity at which the company neither makes a profit nor incurs a loss.
Break-even point (in terms of quantity) is the point where profit becomes zero.
Profit = 0
Revenue - Total variable cost - Total fixed cost = 0
c) To convert the cost equation in terms of quantity into a cost equation in terms of revenue, we need to express the cost equation in terms of the revenue generated.
We know that Revenue = Selling price * Quantity.
d) To find the break-even revenue, we need to find the revenue at the break-even point (where profit is zero).
e) If profit had been Birr 500,000, we need to find the sales volume (revenue) and the quantity of sales when the profit is equal to Birr 500,000.
f) To find the profit if sales were Birr 2,000,000, we need to calculate the profit using the given revenue and cost information.