Chapter 2, Problem 11P

To determine

(a)

The break-even point of the company.

Answer to Problem 11P

300 residents in order to break-even.

Explanation of Solution

Given information:

Price charged by company = $6000/month

Operating expenses = $600,000 per month

Cost per person = $4000 per person per month

a).

Break-even point is the point at which total revenue earned by the company is just sufficient to cover its total cost of operation.

Calculation:

$\begin{array}{l}Totalrevenue=P\times Numberofseniorresidents\hfill \\ Totalcost=\$600,000+\$4,000\times Numberofseniorresidents\hfill \end{array}$

At break-even point,

$\begin{array}{l}Totalrevenue=TotalCost\hfill \\ P\times Numberofseniorresidents=\$600,000+\$4,000\times Numberofseniorresidents\hfill \\ \$6000\times Numberofseniorresidents=\$600,000+\$4,000\times Numberofseniorresidents\hfill \\ \$2000\times Numberofseniorresidents=\$600,000\hfill \\ Numberofseniorresidents=\$600,000\hfill \\ Numberofseniorresidents=300\hfill \end{array}$.

Conclusion:

The Company needs to have 300 senior residents in order to just break-even.

To determine

(b)

The annual profit or loss of the company.

Answer to Problem 11P

Annual profits = $1,200,000.

Explanation of Solution

Given information:

$\begin{array}{l}Pricechargedbycompany=\$6000/month\hfill \\ Operatingexpenses=\$600,000permonth\hfill \\ Costperperson=\$4000perpersonpermonth\hfill \end{array}$.

Calculation:

$\begin{array}{l}Profitpermonth=Totalrevenue–TotalCost\hfill \\ =\left(\$6000\times Numberofresidents\right)–\left(\$600,000+\$4,000\times Numberofresidents\right)\hfill \\ =(\$6,000\times 350)–\left(\$600,000+\$4,000\times 350\right)\hfill \\ =\$2,100,000-\$600,000–1,400,000\hfill \\ =\$100,000\hfill \\ Therefore,annualprofits=\$100,000\times 12=\$1,200,000\hfill \end{array}$.

Conclusion:

Annual profits = $1,200,000.