Question

Hannah Ortega is considering expanding her business. She plans to hire a salesperson to cover trade shows. Because of compensation, travel expenses, and booth rental, fixed costs for a trade show are expected to be $7,500. The booth will be open 30 hours during the trade show. Ms. Ortega also plans to add a new product line, ProOffice, which will cost $150 per package. She will continue to sell the existing product, EZRecords, which costs $100 per package. Ms. Ortega believes that the salesperson will spend approximately 20 hours selling EZRecords and 10 hours marketing ProOffice.
1) Determine the estimated total cost and cost per unit of each product, assuming that the salesperson is able to sell 80 units of EZRecords and 50 units of ProOffice. (Round "Cost per unit" to 2 decimal places.)
2) Determine the estimated total cost and cost per unit of each product, assuming that the salesperson is able to sell 200 units of EZRecords and 100 units of ProOffice.
(c) Explain why the cost per unit figures calculated in Requirement a are different from the amounts calculated in Requirement b. Also explain how the differences in estimated cost per unit will affect pricing decisions.

Answer 1

Answer:

Hannah Ortega

Product lines      ProOffice     EZRecords

1a. Total costs           $10,000     $13,000

b.  Cost per unit      $200.00     $162.50

 

2a. Total costs           $17,500       $25,000

b.   Cost per unit       $175.00        $125.00

c) The total costs under the two requirements were different because of the larger units sold in requirement two.  These larger units shared the total costs, reducing the cost per unit drastically.

Explanation:

a) Data and Calculations:

Fixed costs for trade show = $7,500

Fixed cost per hour = $250 ($7,500/30)

Product lines      ProOffice     EZRecords

Cost per package  $150            $100

Units sold                   50               80

Hours spent              10 hrs           20 hrs

Fixed costs            $2,500      $5,000

Variable costs          7,500        8,000

Total costs           $10,000     $13,000

Cost per unit      $200.00     $162.50

Total cost

Product lines      ProOffice     EZRecords

Units sold                  100             200

Variable costs      $15,000       $20,000

Fixed costs              2,500            5,000

Total costs           $17,500       $25,000

Cost per unit       $175.00        $125.00

c) The total costs under the two requirements were different because of the larger units sold in requirement two.  These larger units shared the total costs, reducing the cost per unit drastically.