Question

7.Cherokee Company sells a single product that has variable costs of $10 per unit. Fixed costs will be $700,000 across all levels of sales shown.

                              Units Sold                               Price per Unit

                                 80,000                                             $35

                                 90,000                                             $33

                               100,000                                             $31

                               110,000                                             $30

                               120,000                                             $28

What price would Cherokee charge to maximize profit? Post full calculation

Answer 1

Solution:

Profit (if Price is $35) = Units Sold* (Sales price - Variable cost) - Fixed Costs = 80,000*($35-$10) - $700,000 = $1,300,000

Profit (if Price is $33) = 90,000*($33-$10) - $700,000 = $1,370,000

Profit (if Price is $31) = 100,000*($31-$10) - $700,000 = $1,400,000

Profit (if Price is $30) = 110,000*($30-$10) - $700,000 = $1,500,000

Profit (if Price is $28) = 120,000*($28-$10) - $700,000 = $1,460,000

Highest profit is $1,500,000 at the level of 110,000 unit sold at a price of $30 per unit.

Therefore, Price to be charged to maximize profit = $30 per unit