Wendel Stove Company is developing a Wendel Stove Company is developing a Proble

Question

Wendel Stove Company is developing a Wendel Stove Company is developing a Problem 8-6 Wendel Stove Company is developing a Wendel Stove Company is developing a "professional"- model stove aimed at the home market. The company estimates that variable costs will be $2,780 per unit and fixed costs will be $12,840,000 per year. Suppose the company wants to set its price equal to full cost plus 30 percent. To determine cost, the company must estimate the number of units it will produce and sell in a year. Suppose the company estimates that it can sell 6,000 units. What price will the company set? Suppose the company sets a price as in part a, but the number of units demanded at that price turns out to be 5,000. Revise the price in light of demand for 5,000 units. What will happen to the number of units that will be sold if the price is raised to the one you calculated in part c?

Explanation / Answer

Hi,

Please find the answer as follows:

Part A:

Variable Cost Per Unit = 2780

Fixed Cost Per Unit = 12840000/6000 = 2140

Full Cost = 2780 + 2140 = 4920

Add 30% Margin = 4920*.30 = 1476

Price Set by the Company = 4920 + 1476 = 6396

Part B:

Variable Cost Per Unit = 2780

Fixed Cost Per Unit = 12840000/5000 = 2568

Full Cost = 2780 + 2568 = 5348

Add 30% Margin = 5348*.30 = 1604.40

Price Set by the Company = 5348 + 1604.40 = 6952.40 or 6952

Part C:

Increase

Thanks.

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