Break Even Price (Microeconomic) – Research Paper Example

The firm currently uses 50,000 workers to produce 200,000 units of output per day. The daily wage (per worker) is $80, and the price of the firm’s output is $25. The cost of other variable inputs is $400,000 per day. The firm has a fixed cost of $800,000 per day. What is the breakeven price? Is the firm breaking even, profitable, or unprofitable? Provide a 1-2 page report to management of the firm. Be sure to show your work to support the decision you outlined in your report. (No reference is needed)
Solution:
This report aims at analyzing the profitability of the firm’s output. Based on the information obtained regarding the costs incurred by the firm, the breakeven point is computed.
Selling Price per unit = $ 25
Total Variable Costs:
Number of units per day = 200,000
Number of workers = 50,000
Total daily wage = $ 80 per day
Total salary per day = $ 80 * 50,000 = $ 4,000,000
Labour rate per unit = $ 4,000,000 / 200,000 units = $ 20 per unit
Other variable costs = $ 40,000 per day
Other variable costs per unit = $ 40,000 / 200,000 units = $ 0.20 per unit
Total Variable costs = $ 20.20 per unit
Contribution per unit = Selling Price – Variable Cost
= $ 25 - $ 20.20
= $ 4.80 per unit
Break Even point = Fixed Costs / Contribution per unit
= $ 80,000 / $ 4.80
= 16,667 units
Hence, it is essential for the firm to sell 16,667 units per day. It is evident that the firm is making profits as it produces 20,000 units per day (assuming that all the 20,000 units are sold). The profit earned by the firm per day is computed as shown below.
Profits = (20,000 – 16,667) * $ 4.80
= $ 15,998 per day
Hence, at the current level of production and costs involved, the firm is profitable, provided the firm is able to sell all the 20,000 units produced per day.