PracticeQuestions

IQuestionsonCost&BreakevenAnalysis(8questions) a)Q=012345 TC=30506081118180 DerivetheschedulesforTVC,TFC,TVC,AC,AVC,AFC,MC&plotthem b)ATireCompanyhastotalfixedcostsof$100,000peryear.Thefirmsaveragevariable costis$80for10,000tires.Atthatlevelofoutput,Artsaveragetotalcostis a.$90 b.$100 c.$110 d.$120

c)AfirmproducesanoutputofQtonsofcartonsatthecostgivenbyTC=Q34Q2+7Q.Findthe outputlevelwhereAVCisminimum&whatisthevalueofAVCatthatoptimaloutputlevel d)TCisgivenas0.05Q30.3Q2.FindtheoptimaloutputlevelwhereACcostisminimum& checkwhetherAC=MCatthatpoint.Isthisoptimaloutputdifferentfromtheoutputlevelwhere MCisminimum? e)AmanufacturerdetermineshistotalcosttobeTC=300Q10Q2+1/3Q3.1)Findtheoutput levelwhereMCisminimum,2)FindoutputlevelwhereACisminimum f)ThecostofmanufacturingaparticulartypeofcricketballisgivenbyTC=Q21200Q+ 360040.Howmanyballsshouldthecompanymanufacture,atwhichthecostisminimum&What willbecostperballatthislevelofproduction? g)Acomputersoftwarefirmwishestostarttheproductionoffloppydisk.Itwasobservedthatthe companyhadtospendRs2lakhsforgatheringthetechnicalinformationinthisregard.Thecostof settingupthemachinesisRs.88,000andcostofproducingeachunitisRs30.Eachfloppycould besoldatapriceofRs45.Generatethecostfunctionforproducingfloppies&calculatethe breakevenpoint. h)Seeinganeedforchildcareinsector56ofGurgaoncity,Ritudecidedtolaunchherowndaycare

service.Herserviceneededtobeaffordable,soshedecidedtochargeRs.500perchildperday. Afterdoingherhomework,Ritucameupwiththefollowingfinancialinformation: SellingPrice(perchildperday):Rs.500 OperatingExpenses(permonth): Rent:Rs.10,000 Maid:Rs.4000 Roomdecoration:Rs.10,000 TotalOperatingExpenses:Rs.24,000 Otherexpenses: Meals:Rs.75perchildperday Snacks:Rs.25perchildperday 1. ThemonthofJunehas20workingdays,MondaythroughFridayforfourweeks.Howmany childrenperdaywillRituneedtotakecareofjusttobreakeveninhernewbusiness?Verify youranswer. 2. RituwouldliketoestimatehowmanychildrenshouldshetakecareofinJuneifshewishto earnaprofitofRs.20,000. i)AfterjoiningMBAcourseatIILM,NikhilfoundoutthatstudentspreferPGaccommodationover hostelaccommodation.NikhilthoughtofstartinghisownbusinesswhilestudyingatIILM.Hedid someresearchandgatherfollowinginformationforthemonthofSeptemberforaflatwithcapacity of5rooms: OperatingExpenses: Rent:Rs.22,000 Electricitycharges:Rs.4000 Cleaning:1000 OtherExpenses:Meal:Rs.80perpersonperday Breakfast:Rs20perpersonperday Otherfacilities:Rs.20perpersonperday HeplanstochargeRs.5400permonth 1. HowmanystudentsperroomdoesheneedforabreakeveninthemonthofSeptember? Verifyyouranswer. 2. IfhewanttoearnaprofitofRs.18000,howmanystudentsdoesheneedinSeptember? Verifyyouranswer. j)TheGoldenpublishingcompanyispublishinganewmathstextbookforwhichithasestimated thefollowingtotalfixedandaveragevariablecost: TotalFixedCost=Copyediting(10,000)+Typesetting(70,000)+Selling&promotion(20,000) AverageVariableCost=printing&binding(Rs6)+shipping&postage(Rs2)+sales commission(Rs1),bookstorediscount(Rs7)+Royaltypaymenttoauthor(Rs4) Theprojectsellingpriceis30Rs.1)Determinethebreakevenoutput&totalsalesrevenue.2)

determinetheoutputlevelthatwouldgenerateatotalprofitofRs60,000andtotalsalesrevenueat thatoutputlevel.3)Ifduetoatechnicalbreakthrough,thetotalfixedcostcanbereducedtoRs 40,000,howwillbethenewbreakevenoutputlevel k)ABCAirwaysfliesbetweenDelhiandBombay.Thecompanyleasesplanesona yearlongcontractatacostthataverages$600perflight.Othercostsinclude maintenance,fuel,flightattendants,pilots,andfoodandbeverages,whichamountto $500perflight.Currently,ABCsrevenuesare$1000perflight.Allpricesand costsareexpectedtocontinueattheircurrentlevels.IfyouareanconsultantadvisingABC companyonitsnextmove,whatwillbeyoursuggestionthecompanyshould 1) droptheflightimmediately. 2) continuetheflightindefinitely. 3) continuetheflightuntiltheleaseexpiresandthendroptheflight. 4) droptheflightnowbutrenewtheleaseifcostsfallorpricesrise.