Question

A firm that has total fixed costs of $20,000 sells its output for $150 per unit and has an average variable cost of $200. If the firm's cost and revenue curves are linear, how much output must the firm produce to break even?

(A) The firm cannot break even.
(B) 300
(C) 500
(D) 400

Answer 1

Answer:

A) the firm cannot breakeven.

Explanation:

Break even point is the point where the company make neither a loss nor profit (i.e. a point where profit is zero).

Break even is computed as Totatl fixed cost/Contribution Margin (ratio).

Contribution margin can be calculated as Sales - Variable Cost (Note that this can be calculated per unit or in total).

In this scenario, the contribution per unit = $150-$200 = -$50 (This means that on every one unit, the company is making a loss contribution margin.

And since the revenue and cost curve is linear (i.e. on a straight line) the loss contribution will continously be made. Hence the company can never break even.