Question

SBD Phone Company sells its waterproof phone case for $114 per unit. Fixed costs total $222,000, and variable costs are $34 per unit. Compute the units of product that must be sold to earn pretax income of $200,000.

Answer 1

To determine the profit-maximizing quantity for Doggies Paradise Inc., total revenue, marginal revenue, total cost, and marginal cost are calculated for each output level and the corresponding curves are sketched. The profit-maximizing quantity occurs when marginal revenue equals marginal cost, which in this case is at four units.

Step-by-step explanation:

To calculate the profit-maximizing quantity for Doggies Paradise Inc., we need to determine the total revenue, marginal revenue, total cost, and marginal cost for each output level from one to five units. Let's start by creating a table:

Units SoldTotal Revenue (TR)Marginal Revenue (MR)Total Cost (TC)Marginal Cost (MC)1$72$72$164 ($100 fixed + $64 variable)$642$144$72$184 ($100 fixed + $84 variable)$203$216$72$214 ($100 fixed + $114 variable)$304$288$72$284 ($100 fixed + $184 variable)$705$360$72$370 ($100 fixed + $270 variable)$86

Next, we sketch the total revenue and total cost curves and marginal revenue and marginal cost curves on separate diagrams. The profit-maximizing quantity is reached when marginal cost equals to marginal revenue, which in this case occurs before the fifth unit as the marginal cost exceeds marginal revenue at the fifth unit. Therefore, the profit-maximizing quantity of Doggie Paradise Inc. is four units, as that is the point just before marginal costs exceed marginal revenue.

Answer 2

5,275

Step-by-step explanation:

The targeted pretax income is the difference between the targeted total sales and the estimated total cost.

The total cost is the sum of the fixed and variable cost. The sales and variable cost are dependent on the level of activities or number of units produced and sold.

Contribution margin is the difference between the sales and variable cost.

Let the number of units to be sold be F

114F - 34F - 222,000 = 200,000

80F = 422,000

F = 422,000/80

= 5,275