CAT 1998 — DILR Question 35
Direction: Answer the questions based on the following information.
Ghosh Babu has a manufacturing unit. The following graph gives the cost for various number of units. Given: Profit = Revenue – Variable cost – Fixed cost. The fixed cost remains constant up to 34 units after which additional investment is to be done in fixed assets. In any case, production cannot exceed 50 units.
If the fixed cost of production goes up by Rs. 40, then what is the minimum number of units that need to be manufactured to make sure that there is no loss?
Answer & solution
- A
10
19
- C
15
- D
20
Profit = Revenue – Variable Cost – Fixed Cost = Revenue – (Variable Cost + Fixed Cost). If we consider (Fixed Cost + Variable cost) as total cost, then as long as the revenue is higher than the total cost, there is a profit. In case the revenue is less than the total cost there would be a loss. If we are to compile the data given in the question it would be as follows:
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Referring to the above table, we can see that if the fixed cost increases by Rs. 40, the profit will reduce by Rs. 40. Hence, we can see that at 10 units he will make a loss of Rs. 30 and at 20 units he will make a profit of Rs. 10. Hence, the answer has to be between (b) and (c). Let us verify for them:
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Thus, we see that to make sure there is no loss, he has to manufacture 19 units.