Question

A company produces 1 comma 0001,000 packages of dog treats per month. The sales price is $ 6.00$6.00 per pack. Variable cost is $ 1.50$1.50 per​ unit, and fixed costs are $ 1 comma 800$1,800 per month. Management is considering adding a vitamin supplement to improve the value of the product. The variable cost will increase from $ 1.50$1.50 to $ 1.70$1.70 per​ unit, and fixed costs will increase by 2020​%. At what sales price for the new product will the two alternatives​ (sell as is or process​ further) produce the same operating​ income? (Round your answer to the nearest​ cent.)

Answer 1

$ 6.56

Step-by-step explanation:

Sales price per unit = $6

Sales price for 1000 units:

= $6 × 1000 units

= $6,000

Contribution = Sales - Variable Cost

= $6,000 - ($1.50 per unit × 1,000 units)

= $6,000 - $1,500

= $4,500

Operating Cost = Contribution - Fixed cost

= $4,500 - $1,800

= $2,700

For further processing:

Variable Cost = $ 1.70 per unit

Variable cost for 1000 units:

= 1000 × 1.70

= $1,700

Fixed Cost = $1,800 + 20% × $1,800

= $1,800 + $360

= $2,160

Let the sale price per unit be "x"

Operating Income = Sales - Variable Cost - Fixed Cost

2,700 = (1000 units × x) - $1,700 - $2,160

2,700 = 1000x - $3,860

1000x = 6,560

x = $6.56