Principle of Finance

Dec 7th, 2013
Anonymous
Category:
Accounting
Price: $15 USD

Question description

Required:

  1. Management believes it can sell a new product for $250. The fixed costs of production are estimated to be $50,000 and the variable costs are $215 a unit for the first scale of operations. The fixed costs of production are estimated to be at $150,000 and variable costs are $170 a unit for the second scale of operations.
    1. Prepare a table similar to the one below and complete with the given levels of output and the relationships between quantity and fixed cost, quantity and variable costs, and quantity and total costs.

First Scale of operations

Quantity

Total Revenue

Variable Costs

Fixed Costs

Total Costs

Profits
(Loss)

0

500

1,000

1,500

2,000

2,500

3,000

Second scale of operations

Quantity

Total Revenue

Variable Costs

Fixed Costs

Total Costs

Profits
(Loss)

0

500

1,000

1,500

2,000

2,500

3,000

    1. What is the exact break-even number of units sold for each scale of operations?
    2. Assume that ½ of the fixed costs in each scale of operations is non-cash depreciation. What is the cash flow generated by each scale of operations if 1,000 of units are sold?
    3. You have been asked to advise the management of this company on which scale of production to use.  Let us assume that the management is uncertain on how many units they can sell, but estimate it will be between 500 and 3,000 units during the first year and progressively more after that.  Please advise management what you learned from the breakeven analysis and the tables that you devised that should help them make up their minds. Give them pros and cons for both alternatives.
  1. The management of a firm wants to introduce a new product. The product will sell for $15.00 a unit and can be produced by either of two scales of operation. Following are the total costs:

First scale of operation
TC = $20,000 + $10.00Q

Second scale of operation
TC = $40,000 + $5.00Q

Following are the anticipated levels of sales:

Year

Unit Sales

1

3,000

2

3,500

3

4,000

4

5,000

What can management expect for profits or losses in years 1 and 2 if it selects the scale of operations with lower fixed costs? On what grounds can management justify selecting this scale of operation? If sales reach 5,000 a year, which is the correct scale of operation?

  1. You have been asked to rank the payback periods of three investments for a business. They each cost $35,000.

Year

A

B

C

1

$10,000

$25,000

$12,500

2

$10,000

$10,000

$8,500

3

$10,000

$4,000

$6,000

4

$10,000

$500

$8,000

5

$10,000

0

$5,000

Rank the investments based on payback period. Would you rank them as investments in that order? Why or why not? See the table above for the cash flows of each.

  1. Given the following information answer the following questions:

TR = $3Q

TC = $1,500 + $2Q

  1. What is the break even level of output?
  2. If the firm sells 1,300 units, what are the firm's earnings or losses?
  3. If sales rise to 2,000 units, what are the firms earnings or losses?
  4. What happens to the breakeven level of output units if the total cost equation were: TC = $2,000 + $1.80Q



Tutor Answer

(Top Tutor) Studypool Tutor
School: UIUC
PREMIUM TUTOR

Studypool has helped 1,244,100 students
Ask your homework questions. Receive quality answers!

Type your question here (or upload an image)

1827 tutors are online

Brown University





1271 Tutors

California Institute of Technology




2131 Tutors

Carnegie Mellon University




982 Tutors

Columbia University





1256 Tutors

Dartmouth University





2113 Tutors

Emory University





2279 Tutors

Harvard University





599 Tutors

Massachusetts Institute of Technology



2319 Tutors

New York University





1645 Tutors

Notre Dam University





1911 Tutors

Oklahoma University





2122 Tutors

Pennsylvania State University





932 Tutors

Princeton University





1211 Tutors

Stanford University





983 Tutors

University of California





1282 Tutors

Oxford University





123 Tutors

Yale University





2325 Tutors