Question

Three years ago, Barbara Jones started a business that creates and delivers holiday and birthday gift baskets to students at the local university. Barbara sells the baskets for $29 each, and her variable costs are $19 per basket. She incurs $12,600 in fixed costs each year. (a) Correct answer iconYour answer is correct. How many baskets will Barbara have to sell this year if she wants to earn $30,900 in operating income? (Round answer to 0 decimal places, e.g. 5,275.) enter a number of baskets rounded to 0 decimal places baskets eTextbook and Media Attempts: 1 of 3 used (b) Last year, Barbara sold 5,000 baskets, and she believes that demand this year will be stable at 5,000 baskets. The following are the actions Barbara could take if she wants to earn $30,900 in operating income by selling only 5,000 baskets. Consider each action independently. (Round per unit answers to 2 decimal places, e.g. 52.75 and fixed cost to 0 decimal places, e.g. 5,275.) 1. Raise selling price per unit to $enter raise in selling price per unit amount in dollar rounded to 2 decimal places 2. Reduce variable costs per unit to $enter reduce variable costs per unit amount in dollar rounded to 2 decimal places 3. Reduce fixed costs to $enter reduce fixed costs per unit amount in dollar rounded to 2 decimal places

Answer 1

(a): No. of baskets = (fixed costs + operating income)/(selling price – variable costs per unit)

= (12600+30900)/(29-19)

= 4,350 baskets

(b): (1): Let selling price per unit be “x”. Thus 12600+30900 = (x-19)*5000

Or x = (12600+30900)/5000 + 19

= $27.70. Thus selling price will have to be reduced to $27.70 (from the earlier $29)

(2): Let the variable cost be “y”. Thus 12600+30900 = (29-y)*5000

Or y = 29 –[ (12600+30900)/5000]

= $20.30. Thus variable cost will have to rise to $20.30 (from the earlier $19)

(3): Let fixed costs be “z”. Thus z+30900 = (29-19)*5000

Or z = [(29-19)*5000] – 30900

= $19,100. Thus fixed costs will increase to $19,100 (from the earlier $12,600)