Question

KK, an aspiring entrepreneur wanted to set up a pen drive manufacturing unit. Since technology was changing very fast, he wanted to carefully gauge the demand and the likely profits before investing. Market survey indicated that he would be able to sell 1 lac units before customers shifted to different gadgets. KK realized that he had to incur two kinds of costs: fixed costs (the costs which do not change, irrespective of the number of units of pen drives produced) and variable costs (= variable cost per unit multiplied by the number of units). KK expected the fixed cost to be Rs. 40 lac and the variable cost to be Rs. 100 per unit. He expected each pen drive to be sold at Rs. 200.

What would be the break-even point (defined as no profit, no loss situation) for KK's factory, in terms of sales?

• A. Rs. 80 lac
• B. Rs. 100 lac
• C. Rs. 120 lac
• D. Rs. 140 lac

Hint:

Find the number of units where revenue equals total cost (fixed plus variable cost), then convert that quantity into a sales value by multiplying by the selling price.

Answer 1

The Correct Option is A

Step 1: Recall the break-even idea.
The break-even point is the sales level at which total revenue exactly equals total cost, so profit is zero. Total cost has two parts: a fixed cost that does not change with output, and a variable cost that grows with the number of units made.

Step 2: Write the cost and revenue in terms of units sold.
Let q be the number of units sold. Total cost = \(40,00,000 + 100q\) (fixed cost plus variable cost per unit times units). Total revenue = \(200q\) (selling price per unit times units).

Step 3: Set revenue equal to cost and solve for q.
\[ 200q = 40,00,000 + 100q \] \[ 100q = 40,00,000 \] \[ q = 40,000 \text{ units} \]
Step 4: Convert the break-even quantity into a sales value.
The question asks for the break-even point in terms of sales (revenue), not units. So multiply the break-even quantity by the selling price: \[ \text{Sales value} = 40,000 \times 200 = 80,00,000 \] This is Rs. 80 lac, which matches option A. The other values (100, 120, 140 lac) would come from using the wrong cost figures or forgetting to convert units into sales value.

Final Answer:
The break-even point in terms of sales is \[ \boxed{\text{Rs. } 80 \text{ lac}} \]