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    Determining a Firm's Annual Profit or Loss

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    A firm has the capacity to produce 1,000,000 units of a product each year. At present, it is operating at 70 percent of capacity. The firm's annual revenue is $700,000. Annual fixed costs are $300,000, and the variable costs are $0.50 per unit. The following equations will be useful.
    Profit = Revenue - Costs
    Revenue = Price each * quantity
    Costs = Fixed Cost + Variable Costs = Fixed Cost + (cost each * quantity)
    At the break even point, Profit = 0

    a. What is the firm's annual profit or loss?
    b. What is the price for each unit?
    c. At what volume of sales does the firm break even?
    d. What will be the profit or loss if the plant runs at 90 percent of capacity?

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    Solution Preview

    a. What is the firm's annual profit or loss?
    Revenue = $700,000
    Variable expense = units produced*variable cost per unit = Capacity *capacity utilization*variable cost per unit=1000000*70%*$0.50
    =$350,000
    Contribution margin = Revenue - ...

    Solution Summary

    The following posting helps determine a firm's annual profit or loss. Step by step calculations are given.

    $2.19

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