Questions
33:390:400:R6 CORPORATE FINANCE Midterm
Single choice
Epsilon, Inc.’s data on revenue and costs for a capital project is non-linear. Up to 100,000 units sold, price is $4.00 per unit and variable cost is $2.00 per unit. After 100,000 units, the market becomes saturated and the price per unit falls from $4.00 to $3.50. Also, there are cost overruns at a production volume of over 100,000 units, so that variable cost per unit goes up from $2.00 to $2.20. Fixed costs remain constant at $50,000. Compute operating income at 200,000 units sold.
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Step-by-Step Analysis
We start by identifying the two production segments due to the non-linear data.
Segment 1: up to 100,000 units. Price = $4.00 per unit, variable cost = $2.00 per unit.
Contribution per unit in Segment 1 = Price - Variable cost = 4.00 - 2.00 = $2.00.
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