Question

Assume that an investor has a manufacturing plant that produces automotive spare parts. The sale price of the part is 22 $/unit. The annual fixed cost of the plant is $1,700,000. Unit variable labor cost is 6 $/unit, unit variable material cost 4 $/unit, unit variable overhead cost 1 $/unit. a )How many units should be produced to start making profit (X)? b) How many units should be produced to make $1000,000 profit (Y)?

Select one:

a. X= 166667, Y= 250000

b. X= 250000, Y= 250000

c. X= 200000, Y= 200000

d. X= 150000, Y= 250000

e. X= 154545, Y= 245454

f. X= 200000, Y= 325000

Answer 1

Ans: X= 154545, Y= 245454

Explanation:

FC = 1,700,000

AVC = 6 + 4 + 1 = 11

P = 22

Breakeven quantity = FC / (P - AVC)

                                = 1,700,000 / (22 - 11)

                                = 154,545

So, X = 154,545

To earn $1,000,000 profit, requires quantity is,

Q = (FC + Required profit) / (P - AVC)

   = (1,700,000 + 1,000,000) / (22 - 11)

   = 245,454

So, Y = 245,454

Thus, option [e] is correct answer.