Question

A company produces 1000 packages of chicken feed per month. The sales price is $5 per pack. Variable cost is $1.60 per unit, and fixed costs are $1800 per month. Management is considering adding a vitamin supplement to improve the value of the product. The variable cost will increase from $1.60 to $1.90 per unit, and fixed costs will increase by 10%. The CEO wants to price the new product at a level that will bring operating income up to $2000 per month. What sales price should be charged? (Round your answer to the nearest cent.)

A)

$3.40

B)

$5.88

C)

$5.00

D)

$3.10

Answer 1

Answer:

• The correct answer  is Option B ($ 5.88 ).

Explanation :

Variable cost per unit = $ 1.90 ( Increase from 1.60 to 1.90)

Fixed cost = $1800*110% = 1980 (increase 10% )

Target profit = $ 2000

Number of units = 1000 packages

Compute contribution margin :

contribution margin

= [Fixed cost+ Target profit]/number of units = [$ 1,980 + $ 2,000]/1000 = $ 3.98 per unit

$ 3.98 per unit

Compute sale price per unit :

sale price per unit

= Variable cost per unit+ Contribution per unit = $ 1.90 + $ 3.98 = $ 5.88

$ 5.88