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Solved Problems

(See student companion site for Excel template.)

• Problem 1

Joe Jenkins, owner of Jenkins Manufacturing, is considering whether to produce a new product. He has considered the operations requirements for the product as well as the market potential. Joe estimates the fixed costs per year to be \$40,000 and variable costs for each unit produced to be \$50.

• (a) If Joe sells the product at a price of \$70, how many units of product does he have to sell in order to break even? Use both the algebraic and graphical approaches.
• (b) If Joe sells 3000 units at the product price of \$70, what will be his contribution to profit?

• Before You Begin

To solve this problem you must first use the break-even formula. Then to compute the contribution to profit, recall that profit is computed as

Profit = total revenue – total cost

• Solution

• (a) To compute the break-even quantity, we follow the equation and substitute the appropriate numerical values: The break-even quantity is 2000 units. This is how much Joe would have to sell in order to cover costs.

Graphically, we can obtain the same result. This is shown in the figure. (b) To compute the contribution to profit with sales of 3000 units:

Profit = total revenue – total cost

= (SP)Q – [F + (VC)Q]

Now we can substitute numerical values: ...

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