Question

A company producing tea can make 1 kg for an average variable cost of £1.20. It must pay fixed costs per month of £2,000 and the company sells 2,500 kg of tea per month. If the firm decides to add a mark-up of 20% what price should it charge per 1 kg of tea? E5.50 £2.40 £3.50 £8.80 £4.20 In order to maximise profits a monopoly will set its output at the point where Marginal revenue equals marginal cost Total revenue equals total cost Marginal revenue is greater than-marginal cost Price is equal to average cost Average revenue is below average cost

Answer 1

Step-by-step explanation:

To calculate the price per 1 kg of tea with a 20% markup, we need to consider both the average variable cost and the fixed costs. Then, we can use the markup percentage to determine the final price.

Given:

Average variable cost = £1.20 per 1 kg of tea

Fixed costs per month = £2,000

Total kg of tea sold per month = 2,500 kg

Markup percentage = 20%

Step 1: Calculate Total Costs

Total Costs = Fixed Costs + (Average Variable Cost * Total kg of tea sold)

Total Costs = £2,000 + (£1.20 * 2,500)

Total Costs = £2,000 + £3,000

Total Costs = £5,000

Step 2: Calculate Price with Markup

Price per 1 kg of tea = Total Costs / Total kg of tea sold + Markup

Price per 1 kg of tea = £5,000 / 2,500 + 20% of the cost

Price per 1 kg of tea = £2 + 0.20 * £2

Price per 1 kg of tea = £2 + £0.40

Price per 1 kg of tea = £2.40

Therefore, the company should charge £2.40 per 1 kg of tea with a 20% markup in order to maximize profits.