Classwork on Capacity Planning

A small firm intends to increase the capacity of a bottleneck operation by adding a new machine.
Annual fixed cost would be tk 42000, variable cost per unit would be tk 15 and revenue per unit
would be tk22.

i) Write down the cost, revenue and profit function.

ii) What annual volume is required to break even?

iii) What would be the profit if 5000 units were made?

iv) How many units must be sold to realize a profit of tk 7000?

iv) If 1000 units can be sold and profit target is tk 4000, what price should be charged per unit?

I) No of units produced and sold = x

Cost function, C(x) = FC+VC

= 42000+15x

Revenue function, R(x) = 22x

Profit function P(x) = R-C= 22x- (42000+15x)

= 22x-42000-15x

= 7x-42000

II) For break even, R=C

22x= 42000+15x

Or, 22x-15x=42000 or, 7x=42000 or, x= 6000 units

iii) P (5000) = 7*5000-42000= 35000-42000= -7000

if 5000 units are sold there will be no profit rather loss of 7000 tk.
IV) 7000= 7x-42000

Or, 7x= 7000+42000 or, 7x= 49000 or, x= 7000

In order to make a profit of 7000tk, 7000 units must be sold.

V) Given, x=1000 units and Profit, P= 4000

Let, Selling price per unit= q

4000= 1000q- 42000-15*1000

Or, 4000= 1000q-42000-15000

Or, 1000q= 4000+57000

Or, q= 61000/1000 or, q=61

In order to sell 1000 units and to make a profit of 4000 tk, selling price per unit
must be 61 tk.