Question

# 7.Cherokee Company sells a single product that has variable costs of \$10 per unit. Fixed costs...

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

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

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