Question

A producer of pottery is considering the addition of a new plant to absorb the backlog of demand that now exists. The primary location being considered will have fixed costs of $9,200 per month and variable costs of 70 cents per unit produced. Each item is sold to retailers at a price that averages 90 cents.

• What volume per month is required in order to break even?
• What profit would be realized on a monthly volume of 61,000 units? 87,000 units?

Answer 1

To break even, the pottery producer needs to produce 46,000 units per month. The profit on a monthly volume of 61,000 units is $6,390 and on a monthly volume of 87,000 units is $13,710.

Step-by-step explanation:

To calculate the break-even volume, we need to determine the total cost and the revenue at the break-even point. The fixed costs are $9,200 per month. The variable costs are 70 cents per unit, and the selling price is 90 cents per unit. Let's assume the break-even volume is x units.

Total cost = fixed cost + variable cost = $9,200 + 0.70x

Total revenue = selling price * x = 0.90x

To break even, the total cost must be equal to the total revenue. Therefore, we have the equation 9,200 + 0.70x = 0.90x. Solving for x, we find x = 46,000 units per month.

The profit can be calculated by subtracting the total cost from the total revenue. For a monthly volume of 61,000 units, the total revenue is 0.90 * 61,000 = $54,900, and the total cost is 9,200 + 0.70 * 61,000 = $48,510. The profit would be $54,900 - $48,510 = $6,390. For a monthly volume of 87,000 units, the total revenue is 0.90 * 87,000 = $78,300, and the total cost is 9,200 + 0.70 * 87,000 = $64,590. The profit would be $78,300 - $64,590 = $13,710.

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