Breakeven Analysis
Management believes it can sell a new product for $250. First Scale of Operations: fixed costs of production are estimated to be $50,000 and the variable costs are $215 a unit Second Scale of Operations: fixed costs of production are estimated to be at $150,000 and variable costs are $170 a unit
a. Complete the tables below for each scale of operations with the given levels of output and the relationships between quantity and fixed cost, quantity and variable costs, and quantity and total costs.
First Scale of Operations
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Total Revenue
|
Variable Costs
|
Fixed Costs
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Total Costs
|
Profit /
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Quantity
|
(Loss)
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0
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500
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1,000
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1,500
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2,000
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2,500
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3,000
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Second Scale of Operations
|
|
Total Revenue
|
Variable Costs
|
Fixed Costs
|
Total Costs
|
Profit /
|
|
Quantity
|
(Loss)
|
|
0
|
|
|
|
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500
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1,000
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1,500
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2,000
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2,500
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3,000
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b. What is the breakeven number of units sold for each scale of operations? Note that partial units cannot be produced.
c. Assume that ½ of the fixed costs in each scale of operations is non-cash depreciation. What is the cash flow generated by each scale of operations if 1,000 of units are sold?
d. Based on the results calculated in the tables for each scale of operations and the breakeven units calculations, what effect does the mixture of fixed and variable costs have on a firm's operating earnings?