Firm XYZ needs to break even

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[email protected]: Junior | Next Rank: 30 Posts; Posts: 29; Joined: Tue Jan 08, 2008 1:42 pm

by [email protected] » Tue Dec 21, 2010 9:32 pm

Please answer this question. I don't agree with the OA
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Firm XYZ incurs fixed overhead costs of $216,000 every year. What price should it charge to break even for the year, if it can sell all of its output?

(1) For every 100 units the company produces, it adds an additional $250 in production costs.

(2) The firm must produce 500 units every month
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OA is C.
Thanks
Archit[/b]

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Source: Beat The GMAT — Data Sufficiency | Tue Dec 21, 2010 9:32 pm

Night reader: Legendary Member; Posts: 1337; Joined: Sat Dec 27, 2008 6:29 pmFollowed by: 10 members; Thanked: 127 times

by Night reader » Tue Dec 21, 2010 10:07 pm

[email protected] wrote:Please answer this question. I don't agree with the OA
---------------
Firm XYZ incurs fixed overhead costs of $216,000 every year. What price should it charge to break even for the year, if it can sell all of its output?

(1) For every 100 units the company produces, it adds an additional $250 in production costs.

(2) The firm must produce 500 units every month
----------------------

OA is C.
Thanks
Archit[/b]

At the first glance on this problem we might pick A. However, stop and try thinking additional sufficiency or insufficiency (that's why I like DS questions!)
Question says that FC (fixed costs)=216 no matter how many units we produce, we need to break even i.e. Total Cost=total FC+ total VC(variable cost), so find VC either way
st(1) precisely gives us VC per unit => $250 for 100 units. Look we don't know total VC, for we don't know the number of units. Not Sufficient.
st(2) precisely gives us the number of units put on production line. Look we don't know the unit VC to calculate total VC and to find Total Cost. Not sufficient.

Combining st(1&2) we get number of units and unit VC. Sufficient.

Answer C is correct.

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[email protected]: Junior | Next Rank: 30 Posts; Posts: 29; Joined: Tue Jan 08, 2008 1:42 pm

by [email protected] » Wed Dec 22, 2010 6:38 am

So we are making the assumption that there are 2 types of costs( FC+VC) involved? Although thats reasonable to believe, I would strictly go by what's given in the question.

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captcha: Junior | Next Rank: 30 Posts; Posts: 19; Joined: Mon Dec 20, 2010 8:56 pm; Thanked: 1 times

by captcha » Wed Dec 22, 2010 8:07 am

Total Cost = Fixed cost + Variable Cost

TC= 216000 + VC * units

Now, Revenue = price * units

For Break even, Revenue = TC

i.e. 216000 + VC*units = price * units;

To solve, we need both VC and no. of units;

in (1). VC is given

but, IMO (2) suggests that "atleast" 500 units be produced (the word "exactly" could have been helpful in statement 2)
if statement 2 says exactly 500; then we need both statements. i.e. C otherwise E

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