# Merowak Missiles has developed its Democratizer Offensive Weapon System (DOWS) for the US military. After sinking \$1 billion into R&D and design, it spent \$0.5 billion building the tools and production facility that are unique to DOWS production. It houses these in standard factory floor space that costs \$1 million. Each missile has a marginal cost of \$2,000. The Pentagon is thinking of discontinuing the program because the missiles are too expensive. If Merowak were to get an order for 50,000 missiles, what would its breakeven price be?

\$100,000,000

Explanation:

To calculate relevant break even cost point we ignore all the sunk funds and fixed costs that have already been paid.

This includes,

R&D funds of \$1 billion

Tools of \$0.5 billion

Factory of \$1 million

None of these are the relevant or incremental costs and thus to calculate break even for this order, they will be avoided.

The Break even cost = 50,000 * 2000 = \$100,000,000

We only account for the cost of producing each additional unit that is the Marginal Cost of \$2,000/missile.

Hope that helps.