Question

A producer of felt-tip pens has received a forecast of demand of 31,000 pens for the coming month from its marketing department. Fixed costs of $25,000 per month are allocated to the felt-tip operation, and variable costs are 40 cents per pen. (a) Find the break-even quantity if pens sell for $2 each. (Round your answer to the next whole number.) (b) At what price must pens be sold to obtain a monthly profit of $23,000, assuming that estimated demand materialized

Answer 1

Answer:

(A) 15,625 units

(B) $1.95

Explanation:

(a) The formula to compute the break even point is shown below:

= (Fixed expenses ) ÷ (Contribution margin per unit)  

where,  

Contribution margin per unit = Selling price per unit - Variable expense per unit  

So For Oven A, the break even point would be

= ($25,000) ÷ ($2 - $0.40)

= $25,000 ÷ $1.60

= 15,625 units

(b) The computation of price is shown below:

Quantity demanded = (Fixed cost + Profit) ÷ (Price - variable cost per unit)

31,000 pens = ($25,000 + $23,000) ÷ (Price - 0.40)

31,000 pens = $48,000 ÷ (Price - 0.40)

So, the price is $1.95