You Own A Plant That Produces 10,000 Copiers Per Year Your F

You Own A Plant That Produces 10000 Copiers Per Year Your Fixed C

Determine the break-even price for a plant producing 10,000 copiers annually with fixed costs of $80,000 and a constant marginal cost per copier of $6. Additionally, analyze how the break-even price would change if production increases by 60%.

Assess whether an initial investment of $60,000, yielding $20,000 annually for five years, is profitable given a discount rate of 12%.

Given a US company's financial data showing revenue of $5.5 million and total costs of $9 million (with fixed costs of $4 million and variable costs of $5 million), leading to a net loss of $2 million, analyze the firm's operational decisions for the short- and long-term. Furthermore, evaluate decisions when revenue drops to $5.0 million, total costs are $7.5 million (fixed costs of $3 million, variable costs of $4.5 million), resulting in a net loss of $2.5 million.

Paper For Above instruction

Understanding the dynamics of fixed costs, variable costs, and their influence on pricing, investment decisions, and operational strategies is fundamental in managerial economics and strategic planning. This paper addresses each scenario provided, analyzing the financial implications and recommending optimal decisions based on economic principles.

Break-even Price Calculation

The break-even price is the minimum price at which total revenues equal total costs, ensuring no profit or loss. For a plant producing 10,000 copiers annually, with fixed costs of $80,000 and a marginal cost per copier of $6, the calculation is straightforward. The total variable cost is the product of the marginal cost and the number of copiers: 10,000 copiers x $6 = $60,000. Therefore, the total cost at the break-even point is the sum of fixed costs and total variable costs: $80,000 + $60,000 = $140,000. Dividing this by the number of units produced gives the break-even price per copier: $140,000 / 10,000 = $14.

In the scenario where production increases by 60%, production volume becomes 16,000 copiers (10,000 + 60% of 10,000). The new total variable cost is 16,000 x $6 = $96,000. Fixed costs remain unchanged at $80,000, so the total costs are $80,000 + $96,000 = $176,000. The new break-even price per copier becomes $176,000 / 16,000 = $11.

This decrease in break-even price illustrates how increased production volume can lower the unit price needed to cover costs, enhancing potential profitability provided the market can sustain the higher volume at the lower price.

Investment Analysis: Discounted Cash Flow

The investment of $60,000 returns $20,000 annually over five years. To determine if this is profitable at a 12% discount rate, the net present value (NPV) of the cash flows must be calculated. The NPV is the sum of the discounted cash flows minus initial investment:

NPV = ∑ (Cash flow per year / (1 + r)^t) - initial investment

Where r = 12%, and t = year 1 to 5. Calculating the present value of an annuity of $20,000 over five years at 12% gives:

PV = $20,000 x [(1 - (1 + r)^-n) / r] = $20,000 x [(1 - (1 + 0.12)^-5) / 0.12] ≈ $20,000 x 3.6048 ≈ $72,096

The NPV is then approximately $72,096 - $60,000 = $12,096. Since the NPV is positive, the investment is profitable, indicating it adds value to the firm and should be undertaken.

Operational Decisions for a Loss-Making Firm

The firm's short-term operational decision depends heavily on its ability to cover variable costs and contribute toward fixed costs. When the revenue is $5.5 million, and total costs are $9 million, with a net loss of $2 million, the firm incurs a significant operational loss. Given that total fixed costs of $4 million are largely unavoidable in the short term, the key consideration is whether the firm can cover its variable costs ($5 million). Since total variable costs are less than revenue ($5.5 million), the firm is covering its variable costs plus some fixed costs, implying it should continue operations temporarily to minimize losses.

In the long term, however, the firm should exit or restructure if long-term profits cannot be achieved. The long-term decision should consider whether the market conditions, cost structure, or product demand will improve.

In the second scenario, revenue drops to $5 million, with total costs at $7.5 million ($3 million fixed, $4.5 million variable), resulting in a greater net loss of $2.5 million. Here, the firm cannot cover its variable costs ($4.5 million > $5 million revenue), meaning it loses more money by continuing operations. It should consider shutting down to avoid further losses, as each unit produced adds to the loss, and the fixed costs are unavoidable only in the long term if remaining in the market is justified by strategic considerations.

Overall, firm decision-making hinges on the comparison of revenues to variable costs in the short term and the ability to cover fixed costs and generate profits in the long term. Strategic exit or restructuring can help mitigate losses and allocate resources more efficiently.

Conclusion

Effective managerial decision-making necessitates a clear understanding of cost structures, investment evaluations, and operational viability. Calculating break-even prices guides pricing strategies under varying production levels, while discounted cash flow analyses aid in assessing investment profitability. Short-term operational decisions should be based on coverage of variable costs, with long-term strategies focusing on market prospects and cost efficiency. As illustrated, firms must continually analyze their financial data, market conditions, and operational capacity to make informed decisions that maximize value and ensure sustainability.

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