The smith company made and sold 10,000 metal tables last year. When output was b
ID: 1190763 • Letter: T
Question
The smith company made and sold 10,000 metal tables last year. When output was between 5,000 and 10,000 tables, its average variable cost was $24. In this output range, each table contributed 60% of its revenue to fixed cost and profit.
A. What was the price per table? B. If the Smith Company increases its price by 10%, how many tables will it have to sell next year to obtain the same profit as last year. C. If the Smith Company increases its price by 10%, and if its average variable cost increases by 8% as a result of wage increases, how many tables will it have to sell next year to obtain the same profit as last year?
Explanation / Answer
A.
Variable Cost per table $ 24
Contribution towards Fixed Cost and profit 60%
Hence Contribution towards Variable Cost 40% (100 – 60)
So Selling Price of per Table 24/40*100 (Variable Cost $ / Variable cost contribution *100)
$ 60
(Selling Price = Fixed Cost + Variable Cost + Profit)
B.
Profit and Fixed Cost for 10000 unit 10000*($60 - $ 24) = $ 360,000
Price increase by 10% $ 60 + 10% = $ 66
Variable cost remain same $ 24
New Profit and Fixed cost on increased price $ 66 - $ 24 = $ 42
No. of tables to be sold on increased price to generate same profit
$ 360,000 / $ 42 = 8571.43 mean 8572
C.
Profit and Fixed Cost for 10000 unit 10000*($60 - $ 24) = $ 360,000
Price increase by 10% $ 60 + 10% = $ 66
Variable cost increased by 8% $ 24 + 8% = $ 25.92
New Profit and Fixed cost on increased price $ 66 - $ 25.92 = $ 40.08
No. of tables to be sold on increased price to generate same profit
$ 360,000 / $ 40.08 = 8982.04 mean 8982
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