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 $13,450 per month and variable costs of $1.06 per unit produced. Each item is sold to retailers at a price that averages $1.23

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)

Answer 1

contribution per unit = sales price per unit - variable cost per unit = 1.23 - 1.06 = $0.17

a) The volume per month is required in order to break even = fixed cost / contribution per unit

= 13450 / 0.17

= 79118 units

b) revenue from sale of 61000 units = 61000 * sales price per unit = 61000 * 1.23 = $75030

total variable cost of 61000 units = 61000 * variable cost per unit = 61000 * 1.06 = $64660

fixed cost = $13450

total cost incurred = fixed cost + total variable cost = $13450 + $64660 = $78110

since total cost incurred is greater than revenue from sales hence loss is incurred.

loss = total cost incurred - total revenue from sale = 78110 - 75030 = $3080

c) The volume is needed to obtain a profit of $16,000 per month = 16000 / contribution per unit

= 16000 / 0.17

= 94118 units

d) The volume is needed to provide revenue of $23,000 per month = 23000 / sales price per unit

= 23000 / 1.23

= 18700 units

Note: All answers are rounded up to nearest whole number