Question

A manufacturing company leases a building for $100,000 per year for its manufacturing facilities. In addition, the machinery in this building is being paid for in installments of $20,000 per year. Each unit of the product produced costs $15 in labor and $10 in materials. The product can be sold for $40. Use this information to answer Problem 2-54 through 2-56. Select the closest answer.

2-54 How many units per year must be sold for the company to breakeven?

1. 4,800
2. 3,000
3. 8,000
4. 6,667
5. 4,000

2-55 If 10,000 units per year are sold, what is the annual profit?

1. $280,000
2. $50,000
3. $150,000
4. −$50,000
5. $30,000

2-56 If the selling price is lowered to $35 per unit, how many units must be sold each year for the company to earn a profit of $60,000 per year?

1. 12,000
2. 10,000
3. 16,000
4. 18,000
5. 5,143

Answer 1

2-54: c. 8,000
(Total Revenue, TR = Price*Quantity = 40Q
Total Cost, TC = 100,000 + 20,000 + [(15+10)*Q] = 120,000 + 25Q
Company will breakeven when TR = TC
So, 40Q = 120,000 + 25Q
40Q - 25Q = 15Q = 120,000
So, Q = 120,000/15 = 8,000)

2-55: e. $30,000
(Annual Profit = TR - TC = 40Q - (120,000 + 25Q) = 40Q - 120,000 - 25Q = 15Q - 120,000
At Q = 10,000; annual profit = (15*10,000) - 120,000 = 150,000 - 120,000 = 30,000)

2-56: d. 18,000
(TR = Price*Quantity = 35Q
Profit = 60,000 = TR - TC = 35Q - (120,000 + 25Q) = 35Q - 120,000 - 25Q = 10Q - 120,000
So, 10Q = 60,000 + 120,000 = 180,000
So, Q = 180,000/10 = 18,000)