Determination of the Production Quantity - Assignment Example

Question No A problem that we may need to solve in business:- Another major problem we commonly face in business is of determination of the production quantity, i.e. what quantity should we produce? Its common answer is that at least we should produce the quantity at which we meet all of our costs which is called the “Break Even Quantity/ volume”. At the breakeven point business fulfills all of its production costs (fixed cost and all types of variable costs) and is neither generating any profit nor facing any loss.

At this point total revenue of firm is equal to its total costs. Normally break even is calculated by using the equation TR=TC, to which we solve using trial and error method by using different production quantities. It is a difficult and long procedure. Alternative formula? We can compute the break even quantity easily by using this equation; V = (FC / P - VC) What are the variables?

V = Break Even volume / quantiy. FC = Fixed Cost. VC= Variable cost per unit. P = Sales price per unit. Why do we need to use this shorthand so much in business? By using this shorthand we can avoid from a tiring calculation and can solve the commonly faced problem of break even calculation in seconds. Question No. 2 Order in which calculations should be done:- 1. Put all the known values in the equation. 2. Solve the values in the small brackets i.e. (P-VCu). 3. Solve the values within the large brackets i.e. multiply U by answer of (P-VCu). 4. Minus the FC from answer of [U * (P-VCu)].

Example is given below; Assume U=500, P= 5 per unit, VC = 3 per unit, FC= 300 NI = [U * (P-VCu)] - FC by putting values in the equation NI = [500 * (5-3)] - 300 NI = [500 * 2] – 300 NI = 1000 – 300 NI = 700 Why does it matter?

It is the only way in which the right answer can be found as it follows the order of PEMDAS (parenthesis, exponents, multiplication, division, addition, subtraction), In other case if we will first minus the FC from U then NI = [500 * (5-3)] – 300 = 200*(5-3) = 200*2 = 400 which is not the right answer.