Often a firm will calculate the break-even point for a price. That is, if we set the price at $X, then how many units will we need to sell to cover costs (that is, our break-even point). Work through the following data and questions to gain a better understanding of this approach.
QUESTIONS
If the price is $20
No. of Units, Q | Allocated fixed Cost, FC | Variable Cost/Unit, V | Total Production Cost, TC= FC+V*Q | Average Unit Cost, ATC= TC/Q | Unit Price, P | Total sales revenue=TR=P*Q | Gross profit= TR-TC |
500 | 7500 | 10 | 12500 | 25.00 | 20 | 10000 | -2500 |
750 | 7500 | 10 | 15000 | 20.00 | 20 | 15000 | 0 |
1000 | 7500 | 10 | 17500 | 17.50 | 20 | 20000 | 2500 |
1250 | 7500 | 10 | 20000 | 16.00 | 20 | 25000 | 5000 |
1500 | 7500 | 10 | 22500 | 15.00 | 20 | 30000 | 7500 |
1750 | 7500 | 10 | 25000 | 14.29 | 20 | 35000 | 10000 |
2000 | 7500 | 10 | 27500 | 13.75 | 20 | 40000 | 12500 |
2250 | 7500 | 10 | 30000 | 13.33 | 20 | 45000 | 15000 |
2500 | 7500 | 10 | 32500 | 13.00 | 20 | 50000 | 17500 |
2750 | 7500 | 10 | 35000 | 12.73 | 20 | 55000 | 20000 |
3000 | 7500 | 10 | 37500 | 12.50 | 20 | 60000 | 22500 |
Breakeven point is the output where profit is equal to zero. Refer to above table, profit is zero at Q=750. So, 750 units should be sold to break even.
If price is $13
No. of Units, Q | Allocated fixed Cost, FC | Variable Cost/Unit, V | Total Production Cost, TC= FC+V*Q | Average Unit Cost, ATC= TC/Q | Unit Price, P | Total sales revenue=TR=P*Q | Gross profit= TR-TC |
500 | 7500 | 10 | 12500 | 25.00 | 13 | 6500 | -6000 |
750 | 7500 | 10 | 15000 | 20.00 | 13 | 9750 | -5250 |
1000 | 7500 | 10 | 17500 | 17.50 | 13 | 13000 | -4500 |
1250 | 7500 | 10 | 20000 | 16.00 | 13 | 16250 | -3750 |
1500 | 7500 | 10 | 22500 | 15.00 | 13 | 19500 | -3000 |
1750 | 7500 | 10 | 25000 | 14.29 | 13 | 22750 | -2250 |
2000 | 7500 | 10 | 27500 | 13.75 | 13 | 26000 | -1500 |
2250 | 7500 | 10 | 30000 | 13.33 | 13 | 29250 | -750 |
2500 | 7500 | 10 | 32500 | 13.00 | 13 | 32500 | 0 |
2750 | 7500 | 10 | 35000 | 12.73 | 13 | 35750 | 750 |
3000 | 7500 | 10 | 37500 | 12.50 | 13 | 39000 | 1500 |
Breakeven point is the output where profit is equal to zero. Refer to above table, profit is zero at Q=2500. So, 2500 units should be sold to break even.
If firm has a market power i.e. it can influence market price. It should first select the output at which the goal of the firm can be met. Price depends upon the output. So, we should first estimate the output level.
Often a firm will calculate the break-even point for a price. That is, if we set...
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