The management of a firm wants to introduce a new product. Theproduct will sell

Question

The management of a firm wants to introduce a new product. Theproduct will sell for $4 a
unit and can be produced by either of two scales of operation. Inthe first, total costs are

TC= $3000+$2.8Q

In the second scale of operation, total costs are
TC=$5000+$2.4Q

a. What is the break-even level of output for each scale ofoperation?

b. What will be the firm's profits for each scale of operation ifsales reach 5,000 units?

c. One-half of the fixed costs are noncash (depreciation). Allother expenses are for cash. If
sales are 2,000 units, will cash receipts cover cash expenses foreach scale of operation?

d. The anticipated levels of sales are

Year            Unit Sales
1                      4,000
2                     5,000
3                     6,000
4     7,000
If management selects the scale of production with higher fixedcost, what can it expect in
years 1 and 2? On what grounds can management justify selectingthis scale of operation? If
sales reach only 5,000 a year, was the correct scale of operationchosen?

Explanation / Answer

x.XWhat is the break-even level of output for each scale of operation?

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