Question

A producer of pottery is considering the addition of a new plant to absorb the backlog of demand that now exists. The primary location being considered will have fixed costs of $19,162 per month and variable costs of $2.64 per unit produced. Each item is sold to retailers at a price that averages S2.69 a) The volume per month is required in order to break even- number) (in whole b) The profit or loss would be realized on a monthly volume of 61,000 units- c)The volume is needed to obtain a profit of S16,000 per month whole number) (io d) The volume is needed to provide revenue of S23,000 per month whole number) (in

Answer 1

SOLUTION :

a.

Let the volume be x units per month to break even.

At break even,

 Revenue = FC + VC. (Per month basis)

=> 2.69 x = 19162 + 2.64x

=> (2.69 - 2.64) x = 19162

=> 0.05 x = 19162 

=> x = 19162 / 0.05  = 383240 units.

So,

The volume per month should be. 383240 unit to break even. (ANSWER).

b.

When volume is 61000 units :

Profit 

= R - C 

= 2.69*61000 - (19162 + 61000*2.64)

= - 16112 ($)

There would be LOSS  at 61000 units level = 16112 ($) .(ANSWER))

c.

Let volume be x units to make profit of $16000 .

Contribution margin per unit = 2.69 - 2.64= 0.05 ($)

As Profit will start after break even.

Profit = (x- 383240)*0.05 

=> 16000 = (x - 383240)*0.05

=> x = 16000/0.05 + 383240

=> x = 703240 units

So,

For making profit of $16000, volume should be 703240 units .(ANSWER))

d.

R = 2.69 x , where x is the number of units produced.

=> 23000 = 2.69 x

=> x = 23000/2.69 = 8550 units.

Volume needed to generate revenue of $23000 = 8550 units (ANSWER).