Carefully think about O/v and I/v. O is the annual operating cost and v is the n
ID: 1197576 • Letter: C
Question
Carefully think about O/v and I/v. O is the annual operating cost and v is the number of units produced PER YEAR. You might be given O/v as a ratio where the annual operating cost has already been calculated (i.e. a co-worker says it is $10/unit) or you may have to calculate it (instead the co-worker says the operating costs are $10 million per year and the number of units produced per year is 1 million).
With respect to I/v. The symbol I is the investment at time 0 in $ and v is as above. You might be told v (i.e. 1 million units per year) or you may have to calculate it (i.e. 2739 units per day are produced which means over a year 2739 x 365 = 1 million units are produced which is v).
Think about the above when doing this question
Question: If the capital for a project was $400 million to produce 10,000 units per year, what is the breakeven price that you need to charge to charge using the CRF from above to calculate the contribution needed to recover the cost of capital and the and an operating cost was $50/unit.
Explanation / Answer
At breakeven, the net profit/loss equals 0.
Let the selling price be x.
Total Revenue = 10000 x
Fixed cost = 400,000,000
Total Variable cost = 50/unit * x units = 50x
Total Cost = 400,000,000 + 50x
At breakeven, Total revenue = Total cost
10000x = 400,000,000 + 50x
9950x = 400,000,000
x = 400,000,000/9950 = $40,201.01
Breakeven price is $40,201.01