Question

A producer of pottery is considering the addition of a new plant to absorb the backlog of demand that now exists. The primary location being considered will have fixed costs of $9,200 per month and variable costs of 70 cents per unit produced. Each item is sold to retailers at a price that aver- ages 90 cents. a. What volume per month is required in order to break even? b. What profit would be realized on a monthly volume of 61,000 units? 87,000 units? c. What volume is needed to obtain a profit of $16,000 per month? d. What volume is needed to provide a revenue of $23,000 per month? e. Plot the total cost and total revenue lines.

Answer 1

Based on the information that is given, the volume per month that will be required to break-even will be 46000 units.

The breakeven quantity will be:

= 9200 / (0.90 - 0.70)

= 9200 / 0.20

= 46000 units.

The profit that would be realized on a monthly volume of 61,000 units will be;

= 0.90(61000) - [9200 + 0.70(61000)]

= 54900 - 51900

= 3000

The profit that would be realized on a monthly volume of 87000 units will be;

= 0.90(87000) - [9200 + 0.70(87000)]

= 78300 - 70100

= 8200

The volume that is needed to obtain a profit of $16,000 per month will be:

= (16000 + 9200) / (0.90 - 0.70)

= 25000/0.20

= 126000 units

The volume that is needed to provide a revenue of $23,000 per month will be:

Quantity = Total revenue / Price

Quantity = 23000/0.90

Quantity = 25556 units

Lastly, the total cost will be:

= Fixed cost + Variable cost .

= 9200 + 70000

= 79200

The total revenue will be:

= Price × Quantity

= 0.90 × 100000

= 90000

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