Consider the following costs for a certain chemical product:
Fixed cost: $2.045 million/year.
Variable costs:
Material cost: 62 cents per gallon of product.
Energy cost: 24 cents per gallon of product.
Labor cost: 16 cents per gallon of product.
Assume that we produce only what we sell. Let P be the selling price in dollars per gallon. Suppose that the selling price and the sales quantity Q are interrelated as follows: Q = 6 × 106 – 1.1 × 106P. Accordingly, if we raise the price, the product becomes less competitive and sales drop.
Use this information to plot the fixed and total variable costs versus Q, and graphically determine the breakeven point(s). Fully label the plot and mark the breakeven points. For what range of Q is production profitable? For what value of Q is pro t a maximum?
