Question

Woody’s widget shop has the following information: the average wid- get has a sales price of $18; raw materials for the widget are $4; it takes 30 minutes to assemble one widget; and production labor is paid $8 per hour. operating expenses are as follows: salaries, $2,500 per week; insurance, $1,200 per quarter; rent, $3,000 per month; and utilities, $1,000 per month.

a.How many widgets must be sold each month in order to break even?
b.How many dollars in sales does this represent?
c.What is the contribution margin for each widget sold?
d. If the goal is to make $100,000 profit per moth, how many widgets must be sold?

Answer 1

To break even, Woody's widget shop needs to sell 770 widgets per month, which represents $13,860 in sales. The contribution margin for each widget sold is $10. To make a $100,000 profit per month, Woody's widget shop must sell a certain number of widgets calculated using the new breakeven point.

Step-by-step explanation:

To determine the number of widgets that must be sold each month in order to break even, we need to calculate the total fixed costs and the variable costs per widget. The fixed costs include salaries, insurance, rent, and utilities, which sum up to $2,500 + $1,200 + $3,000 + $1,000 = $7,700 per month.

The variable cost per widget is the sum of the raw material cost ($4) and the labor cost per widget, which is the labor cost per hour divided by the number of widgets produced per hour. In this case, the labor cost per widget is $8/2 = $4. Therefore, the variable cost per widget is $4 + $4 = $8.

Using these figures, we can calculate the breakeven point by dividing the total fixed costs by the contribution margin per widget. The contribution margin per widget is the sales price per widget ($18) minus the variable cost per widget ($8), which is $10. Therefore, the breakeven point is $7,700/$10 = 770 widgets.

To calculate the total sales in dollars at the breakeven point, we multiply the breakeven point by the average sales price per widget ($18). So, the total sales at the breakeven point are 770 x $18 = $13,860.

The contribution margin for each widget sold is the sales price per widget minus the variable cost per widget, which is $18 - $8 = $10.

If the goal is to make a $100,000 profit per month, we first need to calculate the total fixed costs and the variable costs per widget as described above.

Then, we subtract the desired profit ($100,000) from the total fixed costs to get the new breakeven point. Finally, we divide the new breakeven point by the contribution margin per widget to calculate the number of widgets that must be sold each month.

The process involves calculating the variable cost per widget, the contribution margin per widget, and performing the necessary calculations.