Joe is an aspiring local Minnesota fish rod maker. She will incur a fixed cost o
ID: 1105744 • Letter: J
Question
Joe is an aspiring local Minnesota fish rod maker. She will incur a fixed cost of $26,000 to produce and sell her fish rod design. These costs cover the software needed to design the rod and to be sure it is sufficiently dynamic, and the fee paid to a graphic designer to design introductory marketing materials for the rod.
He can acquire the materials used to make each rod — fishing line for $3, the reel assembly attachment for $6, carbon fiber for the rod for $7, and line guides for $4 — and the labor required to assemble the rod, which amounts to one and a half hours for a worker earning $20 per hour.
He plans to sell the rod for $90. If Minnesota has 5,000 fly fishermen (5% of all fishing licenses sold), what percent of those Minnesota fly-fishermen will have to buy Joe’s rod for her to break even?
Question 1 options:
5%
13%
20%
25%
5%
13%
20%
25%
Explanation / Answer
From the data given we see that the total fixed cost is $26,000. Total variable cost comprises of $20 worth of material and $30 worth of labour. Hence the total variable cost will be $50 per unit of rod. This makes the total cost function TC = 26000 + 50Q.
Total revenue will be 90Q.
The firm will break even when total revenue and total cost are equal which gives
90Q = 26000 + 50Q
Q = 650
Total number of rods needed to be sold to get breakeven is 650. 95% of fishermen will require rods. This gives the total number of fishermen = 5000
Hence the correct percentage will be 650 / 5000 = 13 %.
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