Tri-County G&T sells 150,000 MWh per year of electrical power to Boulder at $75 per MWh, has fixed costs of $82.5 million per year, and has variable costs of $25 per MWh. If Tri-County has 1,000,000 MWh of demand from its customers (other than Boulder), what will Tri-County have to charge to break even?

Tri-County has to charge $824.59 per MWh to breakeven.

Explanation:

Breakeven Point is the level at which a firm neither makes a profit nor a loss.

Step 1 : Calculate the Total Fixed Costs

If If Tri-County has 1,000,000 MWh of demand from its customers other than Boulder, then the total fixed costs has to be established for the company first as follows :

Unit Cost = Total Existing Fixed Costs ÷ Existing Activity (Boulder)

               = $82,500,000 ÷ 150,000 MWh

               = $550 per MWh

Fixed costs including the demand from other customers :

Total MWh = 150,000 MWh ( Boulder) + 1,000,000 MWh (Other customers)

                  = 1,150,000 MWh

Therefore,

Total Fixed Costs = Unit Cost × Total MWh

                              = $550 × 1,150,000 MWh

                              = $632,500,000

Step 2 : Calculate the Break even point in dollars

Break Even Point (dollars) = Fixed Costs ÷ Contribution Margin ratio

Where,

Contribution Margin ratio = Contribution ÷ Sales

                                          = Selling Price - Variable Costs ÷ Sales

                                           = ($75 - $25) ÷ $75

                                           = 0.667

Break Even Point (dollars) =  $632,500,000 ÷ 0.667

                                           = $948,275,862.10

Step 3 : Calculate the unit selling price to break even

Unit Price = Total Sales ÷ Total Units Sold

                = $948,275,862.10 ÷ 1,150,000 MWh

                = $824.59 per MWh

Conclusion :

Tri-County has to charge $824.59 per MWh to breakeven

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