Question

Angie's expects annual sales of 2,400 units, ± 3 percent, of a new product at a price of $59 a unit, ± 2 percent. The expected variable cost per unit is $27.20, ± 2 percent, annual fixed costs are $32,500, and depreciation is $4,400 per year. What is the total annual expense per unit under the pessimistic scenario? Ignore taxes.
a. $41.70
b. $43.59
c. $42.51
d. $40.02
e. $44.55

Answer 1

Answer:

Option (b) is correct.

Explanation:

Variable cost = $27.20(1 + 0.02)

                      = $27.20 × 1.02

                      = $27.74

Cash fixed cost = annual fixed costs ÷ [annual sales(1 - 0.03)]

                          = $32,500 ÷ [2,400(1 - 0.03)]

                          = 13.96

Depreciation = Depreciation ÷ [annual sales(1 - 0.03)]

                          = $4,400 ÷ [2,400(1 - 0.03)]

                          = 1.89

Total annual expense per unit:

= Variable cost + Cash fixed cost + Depreciation

= $27.74 + 13.96 + 1.89

= $43.59