In order to produce a new product, a firm must lease new equipment. The managers feel that they can sell 10,000 units per year at a price of $7.50. If the variable cost of production is $5.00 per unit, what is the most the firm can spend to lease the new equipment without losing money?

Question
Asked Oct 27, 2019

In order to produce a new product, a firm must lease new equipment. The managers feel that they can sell 10,000 units per year at a price of $7.50. If the variable cost of production is $5.00 per unit, what is the most the firm can spend to lease the new equipment without losing money?

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Expert Answer

Step 1

The quantity of output that can be sold in the market is equal to 10,000 and the per unit price that the managers could charge from the market is given to be $7.50 per unit. It is also given that the variable cost of production is equal to $5 per unit.

Step 2

The total revenue that can be generated by the sale of the output can be calculated by multiplying the total output with the per unit price of the commodity. Thus, it can be calculated by multiplying the total quantity of 10,000 with the per unit price of $7.50 as follows:

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Step 3

The total variable cost incurred for producing the output can be calculated by multiplying...

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