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CAT 2007 — DILR Question 6

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Passage / Data

Answer the following question based on the information given below.

The following table shows the break-up of actual costs incurred by a company in last five years (year 2002 to year 2006) to produce a particular product.

The production capacity of the company is 2000 units. The selling price for the year 2006 was Rs. 125 per unit. Some costs change almost in direct proportion to the change in volume of production, while others do not follow any obvious pattern of change with respect to the volume of production and hence are considered fixed. Using the information provided for the year 2006 as the basis for projecting the figures for the year 2007, answer the following questions.

​​​​​​​

What is the minimum number of units that the company needs to produce and sell to avoid any loss?

Answer & solution

Correct answer: 384

  • A

    313

  • B

    350

  • 384

  • D

    747

  • E

    928

Solution

Observing the values through the years, we can say that Material, Labour and Operating costs directly vary with the change in volume of production.

The other costs are almost constant.

If the production is x units, the variable cost for material, labour and operation is 50x, 20x and 30x respectively.

∴ Total variable cost = 100x

Total fixed cost (using information for 2006) = 1400 + 1200 + 400 + 800 + 5800 = 9600

∴ Total cost of producing x units = 100x + 9600 

Now, x = 1400

From the explanation given in the first question, to avoid any loss, 100x + 9600 ≤ 125x

∴ x ≥ 384

Hence, option (c).

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CAT 2007 DILR Q6: What is the minimum number of units that the company needs to produce and sell to avoid any loss? — Solution | TheCATExam