Bob and Bill are college students. They are trying to decide what to do over the next summer....

Question:

Bob and Bill are college students. They are trying to decide what to do over the next summer. Bob's father has suggested that they both come and work at his plastics manufacturing company where each will earn {eq}\$3,600 {/eq} over the summer. Bill's father, who runs the local farmer's market, suggests that they go to a local resort area and sell fresh fruit and vegetables to tourists. Their markup on the produce would be twenty-five percent, so each {eq}\$1.00 {/eq} of revenue would involve a variable cost of {eq}\$0.80 {/eq}. In addition to purchasing the produce, they would have to rent a location. The cost to rent a small roadside stand for the summer is {eq}\$2,400 {/eq}.

(i) How many dollars worth of produce will they have to sell in order to break even in an accounting sense?

(ii) How many dollars worth of produce will they have to sell in order to break even in an economic sense?

Breakeven point:

When firms produce goods and services, it becomes important for them to identify their breakeven point. Breakeven point depicts the units required to produce in order to cover all the expenses incurred for production of goods and services.

Answer and Explanation:

{eq}\begin{align*} {\rm\text{Breakeven}} &= \frac{{{\rm\text{Fixed Cost }}}}{{{\rm\text{Selling price per unit}}--{\rm\text{Variable cost per unit}}}}\\ &= \frac{{\$ 2,400}}{{\$ 1 - \$ 0.80}}\\ &= 12,000{\rm\text{ units}} \end{align*} {/eq}

{eq}\begin{align*} {\rm\text{Dollars worth of produce will they have to sell in order to break even in an accounting sense}} &= \$ 12,000 \times \$ 1\\ &= \$ 12,000 \end{align*} {/eq}

{eq}\begin{align*} {\rm\text{Breakeven}} &= \frac{{{\rm\text{Fixed Cost }}}}{{{\rm\text{Selling price per unit}}--{\rm\text{Variable cost per unit}}}}\\ &= \frac{{\$ 2,400 + \$ 3,600 + \$ 3,600}}{{\$ 1 - \$ 0.80}}\\ &= 48,000{\rm\text{ units}} \end{align*} {/eq}

{eq}\begin{align*} {\rm\text{Dollars worth of produce will they have to sell in order to break even in an economic sense}} &= \$ 48,000 \times \$ 1\\ &= \$ 48,000 \end{align*} {/eq}


Learn more about this topic:

Loading...
How to Calculate the Break-Even Point - Definition & Formula

from

Chapter 5 / Lesson 28
142K

See how to calculate break-even point (in units and dollars). See the variables of the break-even point formula and examples. Understand the purpose of break-even analysis.


Related to this Question

Explore our homework questions and answers library