You have developed a financial model for a new product. Its relevant characteris

Question

You have developed a financial model for a new product. Its relevant characteristics are shown below. There is no salvage value.

Profit is the difference between total cost(initial cost plus variable cost) and total revenue (unit price*demand per year)

For each of the four variables below, find the level of the variable at which the profit is zero if all other variables remain constant

Unit Price $1,000 Demand/yr 500 units Variable cost $500/unit Initial Cost $600,000 Interest Rate 12% per year Service Life 10 years

Explanation / Answer

Let Variable cost per unit= x

Depreciation = 600000/10 = 60000

Interest = 12%*600000 = 72000

Profit = 500*(1000-x)

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