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Homework answers / question archive / A plant operation has fixed costs of $2,000,000 per year, and its output capacity is 100,000 electrical appliances per year

A plant operation has fixed costs of $2,000,000 per year, and its output capacity is 100,000 electrical appliances per year

Economics

A plant operation has fixed costs of $2,000,000 per year, and its output capacity is 100,000 electrical appliances per year. The variable cost is $40 per unit, and the product sells for $90 per unit. a. Construct the economic breakeven chart. b. Compare annual profit when the plant is operating at 75% of capacity with the plant operation at 100% capacity. Assume that the first 75% of capacity output is sold at $90 per unit and that the remaining 25% of production is sold at $70 per unit. a. Use the line drawing tool to plot the lines that represent the Fixed Cost, Total Revenue, and Total Costs. Be sure to properly label your lines Use the point drawing tool to plot the Breakeven point. Be sure to properly label the point. 10,000,000 9,000,000 8,000,000 7.000.000 56,000,000 Cost and Revenue, $ 5,000,000 4.000.000 3,000,000 2,000,000 1,000,000 20.000 80.000 100.000 40.000 60.000 Number of Units

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(a) Economic breakeven:
Breakeven point in output = Fixed costs / (Sales Price per unit – Variable Cost per unit)
Breakeven point in output = $2000000 / ($90 - $40)
Breakeven point in output = 40000 units.

Annual profit when the plant is operating at 75% capacity:
Units produced at 75% capacity = 100000 * 75% = 75000 units.
Total revenue at 75% capacity = 75000 * $90 = $6750000.

Total costs incurred:
Fixed costs = $2000000
Variable costs = 75000 * $40 = $3000000
Total costs = $2000000 + $3000000 = $5000000

Annual profits when the plant operates at 75% capacity = $6750000 - $5000000
Total profits = $1750000
• Annual profit when the plant is operating at 100% capacity.
Total capacity = 100000 units.
Revenue when 75000 units are sold = 75000 * $90 = $6750000
Revenue when balance 25000 are sold = 25000 * $70 = $1750000
Total revenue at 100% capacity = $6750000 + $1750000 = $8500000
Total costs at 100% capacity = $2000000 + $4000000 (100000 * $40)
Total costs = $6000000.
Profits when operating at 100% = $8500000 - $6000000
Total profits = $2000000

Thus, profits are more when the plant operates at 100% capacity.

The required graph is as under:


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