Question

Problem 5-5 A producer of felt-tip pens has received a forecast of demand of 34,000 pens for the coming month from its marketing department Fixed costs of $30,000 per month are allocated to the felt-tip operation, and variable costs are 36 cents per pen. a. Find the break-even quantity if pens sell for $3 each. (Round your answer to the next whole number.) QBEP units b. At what price must pens be sold to obtain a monthly profit of $25,000, assuming that estimated demand materializes? (Round your answer to 2 decimal places. Omit the "S" sign in your response.) Price < Prey. 3 of 5 Next

Answer 1

Fixed cost, FC = $ 30,000 per month

Variable cost, VC = $ 0.36 per pen

a)

Selling price, SP = $ 3

Break-even quantity = Fixed cost / (Selling price - Variable cost)

= 30000 / (3 - 0.36)

= 11,364 units   (rounded to next whole number)

b)

Estimated demand = 34,000 pens

Desired monthly profit = $ 25,000

Target price = (Fixed cost + Desired profit) / Estimated demand + Variable cost

= (30000+25000)/34000+0.36

= $ 1.98   (rounded to 2 decimal places)

Answer 2

SOLUTION :

a.

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

At break even,

 Revenue = FC + VC. (Per month basis)

=> 3.00 x = 30000 + 0.36 x

=> (3.00 - 0.36) x = 30000

=> 2.64 x = 30000 

=> x = 30000/2.64  = 11364 units.

So,

The volume per month should be. 11364 unit to break even. (ANSWER).

b.

Let the price be $p per unit at the demand and production level of 34000 units.

Profit = Revenue - costs

=> 25000 =  p * 34000 - (30000 + 34000*0.36)

=> p = (25000 + (30000 + 34000*0.36)) / 34000

=> p = 1..98 ($) 

Price for a profit of $25000 at materialised demand of 34000 units = 1.98 ($) (ANSWER)