## Answers

Answer:

Problem 1)

part A

d) Given pretax profit =$100,000

Given Profit per unit=$75

Let Volume to sold= X

So total gross profit=75*X

So Pretax profit=75X-500000=100000

**X=8000 units**

**Part B)**

**a)**

Revenue =100* Volume

Fixed cost=$500000

Variable Cost =25*Volume

Total Cost = Fixed Cost + Variable cost

Average cost=Total cost / Volumes

**For Volume =500**

Revenue=100*500=$50000

Fixed cost=$500000

Variable Cost =25*500=$12500

Total Cost = 500000+12500=$512500

Average cost=Total cost / Volumes=512500/500=**$1025**

Volume | Revenue | Fixed Cost | Variable cost | Total cost | Average cost |

0 | 0 | 500000 | 0 | 500000 | NA |

500 | 50000 | 500000 | 12500 | 512500 | 1025.00 |

1000 | 100000 | 500000 | 25000 | 525000 | 525.00 |

1500 | 150000 | 500000 | 37500 | 537500 | 358.33 |

2000 | 200000 | 500000 | 50000 | 550000 | 275.00 |

2500 | 250000 | 500000 | 62500 | 562500 | 225.00 |

3000 | 300000 | 500000 | 75000 | 575000 | 191.67 |

3500 | 350000 | 500000 | 87500 | 587500 | 167.86 |

4000 | 400000 | 500000 | 100000 | 600000 | 150.00 |

4500 | 450000 | 500000 | 112500 | 612500 | 136.11 |

5000 | 500000 | 500000 | 125000 | 625000 | 125.00 |

5500 | 550000 | 500000 | 137500 | 637500 | 115.91 |

6000 | 600000 | 500000 | 150000 | 650000 | 108.33 |

6500 | 650000 | 500000 | 162500 | 662500 | 101.92 |

7000 | 700000 | 500000 | 175000 | 675000 | 96.43 |

7500 | 750000 | 500000 | 187500 | 687500 | 91.67 |

8000 | 800000 | 500000 | 200000 | 700000 | 87.50 |

b) Since Volume and Average cost has inverse relationship Average cost=Total Cost/Volume

Average cost= (Variable Cost + Fixed Cost)/Volume= Average Variable cost+ Fixed Cost/Volume=25+500000/volume

**From above equation it is clear that as the volume increase average cost decreases because Average variable cost remain same and average fixed cost decreases as the volume increases.**

**c)**