Question

Question 1 (5 points) Data for the next 3 questions: Kim Happy has developed a new product that he is considering the production and selling of it. To proceed with this project, Kim will be renting a small building to rent for $1,200 a month that will house production facilities. One major piece of equipment that will be used to manufacture the product will be rented for $800 a month. Kim purchased all of the other needed tools for $7,200 which will last for two years (depreciation will be $300 per month). Utility cost of building is expected to be $300 per month. Material costs to make the product are estimated at $10.00 per unit. Monthly advertising costs for the product are estimated at $2,000. Kim will be using salespeople for selling the product. Sales commission is $4.00 per unit. Kim has rented a truck for delivery of the products to customer at $450 per month. Kim will be paying himself $6,000 per month as salary. Kim believes that he could produce and sell 2500 units per month. Answer the following independent questions. Compute the minimum selling price per unit in order for Kim to breakeven. Example of answer: 2.10

Answer 1

Computation of Total fixed costs Rent - Building Rent - Equipment Depreciation - Tools Utility cost of building Fixed Advertisement expenses Rent - Truck Salary Total Fixed costs (A) $ 1,200 $ 800 $ 300 $ 300 $ 2,000 $ 450 $ 6,000 $ 11,050 Number of units expected to be sold (B): 2500 units Fixed cost per unit (A/B) (C) $ 4.42 Variable costs : Material cost per unit Selling expense per unit Total Variable costs $10.00 $ 4.00 $ 14.00 (D) Total cost per unit (C+D) $ 18.42 Solution 1: Break-even point is the level at which the firm is neither in profit nor in loss i.e, Costs = Sales. Therefore, Minimum selling price per unit will be $ 18.42 Solution 2: if kim plans to sell each unit at $22 per unit profit per unit = ($22 - $18.42) $ 3.58 Solution 3: If production increases by 500 units, Total number of units will be (500 + 2500) (a 3000 units Total Fixed costs (unchanged) (b) $ 11,050 Fixed cost per unit add: Variable cost Total cost per unit (b/a) $ 3.68 per unit (c) $ 14.00 $ 17.68 per unit Profit per unit ($22 - $17.68) $ 4.32

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