In order to produce a new product, a firm must lease equipment at a cost of $25,000 per year. The managers feel that they can sell 10,000 units per year at a price of $15.00. What is the highest variable cost that will allow the firm to at least break even on this project?
A) $12.50.
B) $13.50.
C) $14.50.
D) $15.50.
E) $16.50.

Question

Quizplus · Accepted Answer

To break even, the total revenue must equal the total costs. The total revenue from selling 10,000 units at $15.00 each is $150,000. The fixed costs are $25,000 for leasing equipment. Therefore, the total available for covering variable costs is $150,000 - $25,000 = $125,000. Dividing this by 10,000 units gives a maximum variable cost per unit of $12.50 to break even.

In Order to Produce a New Product, a Firm Must