BREAK-EVEN PROBLEMS
1. The Pastureland Dairy makes cheese, which it sells at local supermarkets. The fixed monthly cost of
production is $4,000 and the variable cost per pound of cheese is $0.21. The cheese sells for $0.75 per
pound; however, the dairy is considering raising the price to $0.95 per pound. The dairy currently
produces and sells 9,000 pounds of cheese per month, but if it raises its price per pound, sales will
decrease to 5,700 pounds per month. Should the dairy raise the price?
2. A travel agency has a travel package that is sold for TL 125. Total fixed costs are TL 80,000, the
present volume is 1,000 customers, total variable costs are TL 25,000 and profit is TL 20,000.
a) Calculate the break-even quantity.
b) How many additional customers are required in order for the agency to have profits increased by TL
1,000?
3. A manufacturing process has a fixed cost of $150,000 per month. Each unit of product being produced
contains $25 worth of material and takes $45 of labor.
a) How many units are needed to break even if each completed unit has a value of $90
b) Calculate the profit or loss at a production volume of 1000 units?
c) Draw the chart and show your findings on the graph.
d) Assume that the firm can purchase this item at a cost of 100 $/unit, instead of producing it. Make
the quantitative analysis that guides the manager whether to produce at home or buy from a
supplier.
4. A company has made an investment of $2.000 to continue its production. After this investment it was
able to produce the product at $5 per unit. The owner relying on demand that is much higher than the
breakeven point thinks to make a higher technological investment. The fixed cost of this investment is
estimated to be $10.000, the variable cost is estimated to be $2 per unit. After which production volume,
the selection of this investment will be economically advantageous. Calculate and draw a breakeven
chart to indicate your findings.
5. A firm plans to begin production of a new small appliance. The manager must decide whether to
purchase the motors for the appliance from a vendor at $7 each or to produce them in-house. Either of
the two processes could be used for in-house production; one would have an annual fixed cost of
$160,000 and a variable cost of $5 per unit, and the other would have an annual fixed cost of $190,0000
and avariable cost of $4 per unit. Draw the graph and determine the range of annual volume for which
each of the alternatives would be best.
6. An electronics firm is currently manufacturing an item that has a variable cost of TL 0.5 per unit and a
selling price of TL 1.00 per unit. Fixed costs are TL 14,000. The current volume is 30,000 units. The
firm can substantially improve the product quality by adding a new piece of equipment at an additional
fixed cost of 6,000 TL. The variable cost would increase to TL 0.60, but the volume should jump to
50,000 units for the higher-quality product.
a. Should the company buy the new equipment? Answer the question by making the necessary
calculations.
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b. The firm is now considering the new equipment and increasing the selling price to $1.10 per unit.
With the higher-quality product, the new volume is expected to be 45,000 units. Under these
circumstances, should the company purchase the new equipment and increase the selling price?
