Question

Pastureland Dairy makes cheese, which it sells at local supermarkets. The fixed monthly cost of production is $4,000, and the variable cost per pound of cheese is $0.21. The cheese sells for $0.75 per pound; however, the dairy is considering raising the price to $0.95 per pound. The dairy currently produces and sells 9,000 pounds of cheese per month, but if it raises its price per pound, sales will decrease to 5,700 pounds per month. Should the dairy raise the price?

Answer 1

Raising the price of cheese will increase the profit for Pastureland Dairy.

Step-by-step explanation:

To determine whether Pastureland Dairy should raise the price of its cheese, we need to compare the costs and revenues at the current price and the potential higher price. At the current price of $0.75 per pound, the dairy sells 9,000 pounds of cheese per month, resulting in total revenue of $6,750 ($0.75 x 9,000). The variable cost per pound is $0.21, so the total variable cost is $1,890 ($0.21 x 9,000). The fixed cost is $4,000.

If the price is raised to $0.95 per pound, the dairy would sell 5,700 pounds of cheese per month, resulting in total revenue of $5,415 ($0.95 x 5,700). The total variable cost would be $1,197 ($0.21 x 5,700). The fixed cost remains the same.

Comparing the two scenarios, at the current price, the dairy has a total profit of $870 ($6,750 - $1,890 - $4,000). If the price is raised, the total profit would be $1,218 ($5,415 - $1,197 - $4,000). Therefore, raising the price would result in a higher profit for the dairy.

Answer 2

The income and margin of safety decrease under the proposed scenario.

It should not raise the price to 0.95. It should analize for another price.

Step-by-step explanation:

Analysis under the current scenario:

Income

(sales price - variable price ) x units sold - fixed cost = income

(0.75 - 0.21) x 9,000 - 4,000

0.54 x 9,000 - 4,000 = 860

Break even point:

4,000/0.54 = 7,407 pounds

Margin of Safety;

9,000 - 7,407 = 1,593 pounds

Analysis under the proposed scenario:

Income

(0.95-0.21) x 5,700 - 4,000 =

0.74 x 5,700 - 4,000 = 218

Break even point:

4,000/0.74 = 5,405

Margin of Safety:

5.700 - 5,405 = 295