Question

Suppose you are the owner of a picture frame store and you wish to calculate how many frames you must sell to cover your fixed and variable costs at a given price. Let's assume that the demand for your frames is strong, so the average price customers are willing to pay for each picture frame is $120. Also, suppose your fixed costs (FC) total $32,000 (real estate taxes, interest on a bank loan, etc.) and unit variable cost (UVC) for a picture frame is $50 (labor, glass, frame, and matting). If your picture frame store sold 2,000 picture frames, what would your profit (or loss) be?
A. a loss of $32,000

B. $0—only able to break even

C. $100,000 profit

D. $108,000 profit

E. $132,000 profit

Answer 1

Answer:

D. $108,000 profit

Explanation:

The average price customers are willing to pay for each picture frame is $120.

Total fixed costs (FC) total $32,000 (real estate taxes, interest on a bank loan, etc.)  

Unit variable cost (UVC) for a picture frame is $50 (labor, glass, frame, and matting).

If the picture frame store sold 2,000 picture frames, the profit will be calculated as follows:

Sales..........................................................(2000*120).......240,000

Less: Variable Costs..............................(2000*50).........100,000

Contribution.........................................................................140,000

Less: Fixed Costs.................................................................32,000

Profit.......................................................................................108,000