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 $9,200 per month and variable costs of 70 cents per unit produced. Each item is sold to retailers at a price that averages 90 cents.
a. What volume per month is required in order to break even?
b. What profit would be realized on a monthly volume of 61,000 units? 87,000 units?
c. What volume is needed to obtain a profit of $16,000 per month?
d. What volume is needed to provide a revenue of $23,000 per month?
e. Plot the total cost and total revenue lines
SOLUTION :
a.
Let the volume be x units per month to break even.
At break even,
Revenue = FC + VC. (Per month basis)
=> 0.90 x = 9200 + 0.70x
=> (0.90 - 0.70) x = 9200
=> 0.20 x = 9200
=> x = 9200 / 0.20 = 46000 units.
So,
Volume per month should be. 46000 unit to break even. (ANSWER).
b.
When volume is 61000 units :
Contribution margin per unit = 0.90 - 0.70 = 0.20 ($)
Profit will start after break even.
So,
Profit = (61000 - 46000)*0.20 = 3000 ($)
So,
Profit at 61000 units level will be $3000 .(ANSWER))
When volume is 87000 units :
Contribution margin per unit = 0.90 - 0.70 = 0.20 ($)
Profit will start after break even.
So,
Profit = (87000 - 46000)*0.20 = 8200 ($)
So,
Profit at 87000 units level will be $8200 .(ANSWER))
c.
Let volume be x units to make profit of $16000 .
Contribution margin per unit = 0.90 - 0.70 = 0.20 ($)
As Profit will start after break even.
Profit = (x- 46000)*0.20
=> 16000 = (x - 46000)*0.20
=> x = 16000/0.20 + 46000
=> x = 126000 units
So,
For making profit of $16000, volume should be 126000 units .(ANSWER))
d.
Let volume be x units to make revenue of $23000.
So, R = 23000 = 0.90 x
=> x = 23000/0.9 = 25555.56 = 25556 units.
So,
Volume should be 25556 units to have revenue of $23000 . (ANSWER)
e.
R = 0.90x
C = 9.2 + 0.70x
Where x, R and C are in thousands.
Use demos.com to see the graphs. Write expressions in the LHS boxes 1 and 2.
See the graphs on the RHS in different colours on the same grid. Point of intersection is break even point (46, 41.4) (in thousands) . So, BEP is 46000 units and both Revenue and Costs are $41400 .
Fixed cost (FC) = 9200 per month
Variable cost (VC) = 70 cents per unit
Selling price (SP) = 90 cents per unit
a) For break even, Total cost = Total revenue
For break even quantity "Q", Total cost = FC + Q*VC
Total revenue = Q*SP
So, 9200 + Q*0.70 = Q*0.90
Q = 46000 units
b)
Profit = Total revenue - Total cost = Q*SP - (FC + Q*VC)
Q = 61000
Profit = 61000*0.9 - (9200 + 61000*0.7) = 3000 $
Q = 87000
Profit = 87000*0.9 - (9200 + 87000*0.7) = 8200 $
c) For Profit = 16000, let quantity be Q
16000 = Q*0.9 - (9200 + Q*0.7)
16000 - 9200 = Q*0.2
Q = 126000
d) For revenue of 23000, let quantity be Q
Revenue = SP*Q
23000 = 0.9*Q
Q = 115000
A producer of pottery is considering the addition of a new plant to absorb the backlog of demand that now exists
> In part (b) in the solution, please read 87000 in place of 61000 in the last line of ANSWER for 87000 units level..
Tulsiram Garg Fri, Sep 3, 2021 9:55 AM