Question

Luna makes candy however their product is not unique so they are price takers.

The product sells for $4 per bar and the fixed costs are $120,000 per year

Luna sells 100000 bars per year

Luna investors expects a 10% return on their 2 million investment what is the most variable cost per unit mass can have and still satisfy its investors demands

What is the most variable cost per unit Luna can have and still satisfy investors demands?

Answer 1

Selling price per unit = $4

Fixed costs = $120,000

Number of units sold = 100,000

Investment = $2,000,000

Return on investment = 10%

Net income = Investment x Return on investment

= 2,000,000 x 10%

= $200,000

Variable cost per unit = ?

Let the variable cost per unit $K

sales revenue = Number of units sold x Selling price per unit

= 100,000 x 4

= $400,000

Total variable cost = Number of units sold x Variable cost per unit

= 100,000K

Net income = Sales revenue - Total variable costs - Total fixed costs

200,000 = 400,000-100,000K-120,000

100,000K = 80,000

K = $0.80

Hence, variable cost per unit = $0.80

The most variable cost per unit Luna can have and still satisfy investors demands = $0.80