Use the following to answer the questions below.
Luvmatics plans to produce a new product.Three different models are planned: the Regular,Large,and Jumbo.The fixed costs depend on which of two locations are used;in San Francisco the fixed costs would be $2.5 million per year,but in Tuttle the fixed costs would be $1.2 million.Sale prices and variable costs for the three models are shown in the table. Table A.1
-Use the information in Table A.1.Assume the fixed costs and sales price in both locations are constants and the variable costs in San Francisco are as shown in the table.By how much would the variable cost in Tuttle have to rise to give both locations an identical break-even point for the Regular model?
A)$0.40
B)$5.40
C)$10.40
D)$15.40

Question

Use the following to answer the questions below.
Luvmatics plans to produce a new product.Three different models are planned: the Regular,Large,and Jumbo.The fixed costs depend on which of two locations are used;in San Francisco the fixed costs would be $2.5 million per year,but in Tuttle the fixed costs would be $1.2 million.Sale prices and variable costs for the three models are shown in the table.  Table A.1
-Use the information in Table A.1.Assume the fixed costs and sales price in both locations are constants and the variable costs in San Francisco are as shown in the table.By how much would the variable cost in Tuttle have to rise to give both locations an identical break-even point for the Regular model?
A)$0.40 
B)$5.40 
C)$10.40 
D)$15.40

Quizplus · Accepted Answer

To find the break-even point, we need to set the total cost equal to the total revenue and solve for the quantity sold.
Let Q be the number of units sold.
For San Francisco:
Total cost = Fixed cost + variable cost * Q = $2.5 million + $1.50 * Q
Total revenue = Sales price * Q = $5.00 * Q
Set these equal and solve for Q:
$2.5 million + $1.50Q = $5.00Q
$2.50Q = $2.5 million
Q = 1 million
For Tuttle:
Total cost = Fixed cost + variable cost * Q = $1.2 million + (variable cost + x) * Q
Total revenue = Sales price * Q = $5.00 * Q
Set these equal and solve for Q (using the quantity sold at the break-even point in San Francisco):
$1.2 million + (variable cost + x) * 1 million = $5.00 * 1 million
$3.8 million = (variable cost + x) * 1 million
variable cost + x = $3.80
x = $3.80 - variable cost
So, for both locations to have the same break-even point for the Regular model, the variable cost in Tuttle would have to increase by $10.40 ($3.80 - $1.40 = $2.40).

Use the Following to Answer the Questions Below