1. ABC’ company’s cost function for the next four months is C= 500,000 + 5q.
Required:
a) The break-even volume of sales if the selling price is Birr 6 per unit.
b) What would be the company’s cost if it decided to shut down operations for the next four months?
(a) 6q = 500,000 + 5q
(b) set q=0
To calculate the break-even volume of sales, we need to find the quantity (q) when the cost equals the revenue (selling price multiplied by quantity).
Given:
Cost function: C = 500,000 + 5q
Selling price per unit: Birr 6
a) Break-even volume of sales:
Revenue = Selling Price * Quantity
Cost = Revenue
Let's substitute the values into the equation:
Cost = Revenue
500,000 + 5q = 6q
Simplifying the equation:
500,000 = q
Therefore, the break-even volume of sales is 500,000 units.
b) If the company decides to shut down operations, the cost would be zero since there would be no production.
To calculate the break-even volume of sales, we need to find the quantity (q) at which the revenue equals the total cost.
Given:
Cost function: C = 500,000 + 5q
Selling price per unit: $6
a) Break-even volume of sales:
The revenue formula is: R = Selling Price * Quantity
To find the break-even point, we set R equal to C and solve for q.
R = C
6q = 500,000 + 5q
q = 500,000
Therefore, the break-even volume of sales is 500,000 units.
b) If the company decided to shut down operations for the next four months, there would be no production or sales. Hence, the cost (C) for the next four months would be zero.