A firm Manufactures & Markets a product that sells for birr 20 per unit. Fixed costs associated with activity total birr 40,000 a month, While variable cost per unit is birr 10. A maximum of 10,000 units can be produced & sold.
Required:
For how many units should the firm plan to break even?
Answer:
Well, to break even, the firm should plan to sell enough units to cover both their fixed costs and their variable costs. Since the fixed costs are birr 40,000 and the variable cost per unit is birr 10, we can calculate the breakeven point as follows:
Breakeven point = Fixed costs / (Selling price per unit - Variable cost per unit)
Breakeven point = 40,000 / (20 - 10)
Let me just get my calculator... *beep boop beep* Ah, there we go!
Breakeven point = 4,000 units
So, the firm should plan to break even by selling 4,000 units.
To reach the answer, we are required to perform multiple calculations. Let's break it down step by step.
1. Calculate the total variable costs:
The variable cost per unit is birr 10, and the maximum number of units that can be produced and sold is 10,000. So, the total variable cost can be calculated by multiplying the variable cost per unit by the maximum number of units:
Total variable cost = Variable cost per unit x Maximum number of units
Total variable cost = birr 10 x 10,000
Total variable cost = birr 100,000
2. Calculate the total costs:
The total costs include both fixed costs and variable costs. We already know the fixed costs, which are birr 40,000. To calculate the total costs, we need to add the fixed costs to the total variable costs:
Total costs = Fixed costs + Total variable costs
Total costs = birr 40,000 + birr 100,000
Total costs = birr 140,000
3. Calculate the total revenue:
The selling price per unit is birr 20, and the maximum number of units that can be sold is 10,000. So, the total revenue can be calculated by multiplying the selling price per unit by the maximum number of units:
Total revenue = Selling price per unit x Maximum number of units
Total revenue = birr 20 x 10,000
Total revenue = birr 200,000
4. Calculate the profit:
Profit can be calculated by subtracting the total costs from the total revenue:
Profit = Total revenue - Total costs
Profit = birr 200,000 - birr 140,000
Profit = birr 60,000
Therefore, the profit for the firm would be birr 60,000.
To find the breakeven point, we need to determine how many units need to be sold in order to cover the total costs (fixed and variable costs).
Step 1: Calculate the total variable costs:
Variable cost per unit = birr 10
Maximum units that can be produced and sold = 10,000
Total variable costs = Variable cost per unit x Maximum units
Total variable costs = birr 10 x 10,000
Total variable costs = birr 100,000
Step 2: Calculate the breakeven point:
Breakeven point = Total costs / Selling price per unit
Total costs = Fixed costs + Total variable costs
Total costs = birr 40,000 + birr 100,000
Total costs = birr 140,000
Breakeven point = birr 140,000 / birr 20
Breakeven point = 7,000 units
Therefore, the firm needs to sell 7,000 units in order to cover all costs and reach the breakeven point.