QUESTION 3 A producer of pottery is considering the addition of a new plant to a

Question

QUESTION 3 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 S8,052 per month and variable costs of S1.96 per unit produced. Each item is sold to retailers at a price that averages $2.05 a) The volume per month is required in order to break even b) The profit or loss would be realized on a monthly volume of 61,000 units c) The volume is needed to obtain a profit of S 16,000 per month : d) The volume is needed to provide revenue of S23.000 per month (in whole number) - (in whole number) (in whole number)

Explanation / Answer

Given fixed cost F= 8052

Variable cost V = $1.96

Price S = 2.05

a)

Break even = F/(S-V) = 8052/(2.05-1.96) = 89467 units

b)

Profit = (S-V)Q – F = (2.05-1.96)*61000 – 8052 = -2562

c)

Given Profit = 16000

16000 = (2.05-1.96)*Q– 8052

Q = 267245 units

d)

Revenue = Quantity * Price

23000 = Q*2.05

Q = 11220 units

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