Omar Corporation manufactures faucets. The variable cost of production are $37 p

Question

Omar Corporation manufactures faucets. The variable cost of production are $37 per faucet. Fix cost of production are $876,000. Omar sells the faucets for a price of $61 per unit.

a) How many faucets must Omar make and sell to break even?

b) How many faucets must Omar make and sell to earn a $225,000 profit

c) The marketing manager believes that sales would increase dramatically if the price were reduced to sell $57 per unit. How many faucets must Omar make and sell to earn a $225,000 profit, assuming the sales price is set at $57 per unit?

Explanation / Answer

Assume break even sales are X units

so at break even sales cost of production is equal to sales

so X*61=$876,000

X=$876,000/61=14,361

X*$37+Fixed cost =$876,000

Fixed cost=$876,000-14,361*$37=$344,643

a) Break even sales=14,361 units

sales=$876,000

b)

contribution=$61-$37=$24

sales in units=($344,643+$225,000)/$24=23,735

sales=23,735*61=$1,447,835

C)

revised contribution=$57-$37=$20

Sales in units=($344,643+$225,000)/$20=28,482

sales=28,482*$57=$1,623,474

Increased sales=$1,623,474-$1,447,835=$175,639

Increased sales %=$175,639/$1,447,835*100=12.13%

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