Question

The marketing manager of Barry Corporation has determined that a market exists for a watch with a sales price of $82.50 per unit. The production manager estimates the annual fixed costs of producing between 5,000 and 20,000 watches would be $355,000. Assume that Barry Co. desires to earn a $500,000 profit from the watches sales. How much can Barry Co. afford to spend on variable cost per unit if production and sales equal 18,000 watches?

Answer 1

The marketing manager of Barry Corporation wants to know how much they can spend on variable costs per unit when producing 18,000 watches to achieve a desired profit of $500,000. The answer is $630,000.

Step-by-step explanation:

To calculate the amount Barry Co. can afford to spend on variable cost per unit, we need to determine the total fixed costs, desired profit, and the number of units produced.

Given:

1. Sales price per unit = $82.50
2. Fixed costs = $355,000
3. Desired profit = $500,000
4. Number of watches produced = 18,000

To calculate the total variable costs, we can use the equation:

Total Variable Costs = Total Revenue - Fixed Costs - Desired Profit

Total Revenue = Sales Price per unit * Number of watches produced

Substituting the given values:

Total Revenue = $82.50 * 18,000 = $1,485,000

Total Variable Costs = $1,485,000 - $355,000 - $500,000 = $630,000

Therefore, Barry Co. can afford to spend $630,000 on variable cost per unit when producing 18,000 watches.