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 $12,388 per month and variable costs of $0.91 per unit produced. Each item is sold to retailers at a price that averages $1.11

a) The volume per month is required in order to break even =  (in whole number)
 
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 $16,000 per month =  (in whole number)
 
d) The volume is needed to provide revenue of $23,000 per month =  (in whole number)

Explanation / Answer

a) Break even point (in Units)= Fixed Cost divided by Contribution Per unit.

12388/(1.11-.91)= 61940 Units.

So when company produces 61940 Units per month there will be no profit or loss and the Fixed Cost will be equal to the Contribution and Profit is Zero.

b) if it produces 61000 Units contribution is 61000*.2= 12200 and the fixed cost is 12388 then there is a loss of 188(12200-12388). Hence the loss is 188 USD

c) (1.11-0.91)=0.2 Contribution per unit

Total Contribution =0.2 multiplied by X

0.2 X = Fixed Cost+ Desired Profit

0.2X= 12388+16000

Hence X= 28388/.2

Sales Volume is 141940 Units

d) .2X=12388+23000

Sales Volume= 176940 Units

Let me know if you have further queries

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