To find the amount of fixed cost, we can use the contribution margin formula:
Unit selling price - unit variable cost = contribution margin
Birr 2.00 - Birr 1.25 = Birr 0.75
Contribution margin ratio = contribution margin / unit selling price = Birr 0.75 / Birr 2.00 = 0.375
The contribution margin ratio represents the portion of each sale that contributes towards covering the fixed costs and generating profit. We can use this ratio to find the fixed cost:
Fixed cost = (total revenue x (1 - contribution margin ratio)) / contribution margin ratio
Fixed cost = (Birr 550,000 x (1 - 0.375)) / 0.375 = Birr 733,333.33
To develop the total revenue function, we can use the formula:
Total revenue = unit selling price x quantity
Total revenue = Birr 2.00q
To develop the total cost function, we can use the information given in the question:
Total cost = 75% of total revenue
Total cost = 0.75(Birr 2.00q) = Birr 1.50q
To develop the total profit function, we can use the formula:
Total profit = total revenue - total cost
Total profit = Birr 2.00q - Birr 1.50q = Birr 0.50q
Therefore, the total revenue function is Birr 2.00q, the total cost function is Birr 1.50q, and the total profit function is Birr 0.50q.
Mr.Kedir milk manufacturing company has started producing and selling a product. In its first year it has the following operations:
Unit selling price--------Birr 2.00
Unit variable cost--------Birr 1.25
Total revenue------------Birr 550,000
Total cost ----------------75% of total revenue
Assuming linearity, answer the following
What is the amount of fixed cost?
Develop total revenue, total cost and total profit functions in terms of quantity.
1 answer