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Unformatted text preview: hich quantity should Chesapeake Bay stop producing additional swings?
7 Marginal Revenue
120 Marginal Cost
220 Total Profit
Marginal revenue is the extra revenue associated with selling an extra unit of output. As long as the revenue of the last unit produced and sold is greater than the cost of the last unit produced and
sold, the firm should continue manufacturing.
The student should find the point in the schedule where marginal revenue is equal to marginal
cost, which is at 5 units. The firm would not stop producing at 4 units, even though the addition
of the fifth unit did not add any profits. This is because the firm could not determine an increase
or decrease in profits after the fourth unit until an additional unit had been produced.
KEY: CB&E Model Pricing OBJ: 19-5 TOP: AACSB MSC: BLOOMS Synthesis 14. What is a break-even point? The Catera Company makes and sells cotton candy machines. What
is the break-even volume for Catera machines in units?
Catera Machines Financial Information
Research and development
Overhead allocation $ 40,000
20,000 Catera’s selling price
Average variable cost $600
A break-even point is that level of units sold at a certain price at which no profit or loss is
incurred. Break-even analysis determines what sales volume must be reached for a product before
the company breaks even (total costs are equal to total revenue).Using the break-even formula
indicates that Catera must sell 800 cotton candy machines to break even.
Fixed cost contribution = Selling price – Average variable cost
Fixed cost contribution = $600 – $350 = $250Break-even quantity = Total fixed costs ÷ Fixed
Break-even quantity = $200,000 ÷ $250 = 800 units
KEY: CB&E Model Pricing OBJ: 19-5 TOP: AACSB MSC: BLOOMS Synthesis 15. Name two advantages and two disadvantages associated with the use of break-even analysis.
Advantages of using break-even analysis include that it (1) provides a quick estimate of how
much the firm must sell to break even, (2) provides information about how much profit can be
earned if a higher sales volume is obtained, and (3) reduces the dependence on marginal cost and
revenue data, which are frequently unavailable.
Disadvantages of using break-even analysis include that (1) it is difficult to know whether a cost
is fixed or variable and (2) failure to account for the concept of demand. For example, a firm may
not be able to sell the break-even number of units because demand may be limited to fewer units. PTS: 1
KEY: CB&E Model Pricing OBJ: 19-5 TOP: AACSB MSC: BLOOMS Synthesis 16. As a product moves through its life cycle, the demand for the product and the competitive
conditions tend to change. For each stage in the product l...
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This document was uploaded on 09/29/2013.
- Fall '13