Answer to Question #13072 in Economics of Enterprise for Muna

Question

Offshore Petroleum's fixed costs are $2,500,000 and its debt repayment requirements are
$1,000,000. Selling price per barrel of oil is $18 and variable costs per barrel are $10.
(a) Determine the breakeven output (in dollars).
(3 marks)
(b) Determine the number of barrels of oil that offshore must produce and sell in order to earn
a target (operating) profit of $1,500,000.
(3 marks)
(c) Determine the degree of operating leverage at an output of 400,000 barrels.
(3 marks)
(d) Assuming that sales of oil are normally distributed with a mean of 362,500 barrels and a
standard deviation of 100,000 barrels, determine the probability that Offshore will incur an
operating loss.

Answer 1

(a)&
Breakeven output = $2,500,000/($18-$10)=312 500

(b)
Output = 312 500 +$1,500,000/($18-$10)= 500 000