Ice Cream Producer Economic Break-even Analysis
a. What is the economic breakeven level of production?
How can we calculate the economic breakeven level of production for the ice cream producer?
b. Calculate the ice cream producer’s monthly profits at full capacity. What would happen to the monthly profits if another ice cream producer entered the market, driving the price of ice cream tubs down to $7 per unit?
How can we calculate the ice cream producer's monthly profits at full capacity? And how would the entry of another producer affect the monthly profits?
Economic Breakeven Level of Production
The economic break-even point for a company is the point at which the total costs equal the total revenue.
Since this will allow the organization to break even or have a net profit of $0, it is known as the break-even point. We can obtain the economic break-even point by setting the total revenue equal to the total cost.
Monthly Profit at Full Capacity
The producer's monthly profit at full capacity can be determined by subtracting the total costs from the total revenue.
To calculate the economic breakeven level of production, we need to find the quantity of ice cream tubs that must be produced to reach this point. This can be calculated by setting the total revenue equal to the total cost.
Economic Breakeven Level of Production
The economic breakeven level of production for the ice cream producer can be calculated by finding the quantity of ice cream tubs that need to be produced to cover both fixed and variable costs. In this case, the total revenue needs to equal the total cost for the producer to break even.
We can start by using the formula:
Total revenue = Total cost
Revenue per tub x Number of tubs = Fixed cost + Variable cost per tub x Number of tubs
By substituting the given values, we can find the economic breakeven level of production:
10q = 70,000 + 3q
Solving the equation gives:
7q = 70,000
q = 10,000 tubs
This implies that the ice cream producer must generate and sell 10,000 ice cream tubs per month in order to break even.
Monthly Profit at Full Capacity
At full capacity, the producer can produce up to 15,000 ice cream tubs per month. To calculate the monthly profit at full capacity, we need to consider the revenue generated and the total costs incurred.
Revenue per month = 15,000 x $10 = $150,000
Variable costs per month = 15,000 x $3 = $45,000
Total cost per month = Fixed cost + Variable cost = $70,000 + $45,000 = $115,000
Therefore, the producer's monthly profit at full capacity is:
Monthly profit = Revenue - Total cost = $150,000 - $115,000 = $35,000
If another ice cream producer enters the market and drives the price of ice cream tubs down to $7 per unit, the revenue per month would decrease to $105,000.
This change would impact the monthly profit of the ice cream producer as the revenue decreases while the variable costs remain the same. The monthly profit would be affected based on the new pricing in the market.