Question

Jeremy opens a chocolate shop in the city. He pays 1,500 a month for rent and maintenance of the shop. The price of raw materials and manufacturing the chocolates is6,000 a month. He sells the chocolates individually and in boxes of a dozen. Jeremy understands that his business needs a little time to become a success and decides that he wants to build a customer base initially. He is happy to break even for the first year. If Jeremy sells 2,400 individual chocolates and 50 boxes a month, how should he price his chocolates to break even, given the costs? (Assume that the price of a box is the same as the price of 12 individual chocolates.)

1) $1.50 apiece
2) $2.00 apiece
3) $2.50 apiece
4) $3.50 apiece

Answer 1

Jeremy should price his chocolates at $2.50 apiece to break even.

Step-by-step explanation:

Jeremy should price his chocolates at $2.50 apiece to break even. Let's break down the costs and revenues:

• Rent and maintenance: $1,500/month
• Raw materials and manufacturing: $6,000/month
• Total fixed costs: $1,500 + $6,000 = $7,500/month
• Individual chocolates sold: 2,400/month
• Boxes of chocolates sold: 50/month
• Total variable costs per unit: ($6,000 + $1,500) / (2,400 + 50) = $2.32
• Revenue per individual chocolate: $2.50
• Revenue per box of chocolates (equivalent to 12 individual chocolates): $2.50 x 12 = $30
• Total revenue: (2,400 x $2.50) + (50 x $30) = $6,000 + $1,500 = $7,500/month
• Total costs: $7,500/month (fixed costs) + ($2.32 x 2,400) + ($2.32 x 50) = $7,500 + $5,568 + $116 = $13,184/month

Since the total revenue equals the total costs at the break-even point, Jeremy should price his chocolates at $2.50 apiece to cover all expenses and break even.