Doggie Pals produces 100,000 dog collars each month that give off a fresh scent

Question

Doggie Pals produces 100,000 dog collars each month that give off a fresh scent to keep your dog smelling clean between baths. Total manufacturing costs are $200,000. Of this amount, $150,000 are variable costs. What are the total production costs when 125,000 collars are produced? (Assume both production levels are in the same relevant range.)

A) $187,500

B) $250,000

C) $387,500

D) $237,500

Grosheim Incorporated has fxed expenses of $212,500 per year. Right now, Grosheim Incorporated is selling its products for $125 per unit. Management is contemplating a 25% increase in the selling price for the next year. Variable costs are currently 40% of sales revenue and are not expected to change in dollar amount on a per unit basis next year (the company will pay the same amount for variable costs next year)

If fixed costs increase 10% next year, and the new selling price per unit goes into effect, how many units will need to be sold to breakeven?

A. 2,200 units

B. 233,750 units

C. 2,877 units

D. 1,133 units

Please provide an explaination, step by step, for a better understanding, thank you!

Explanation / Answer

1.Varibale Cost per Dog Collar= $150,000/100000 = $1.5

Fixed Costs = $50,000

Total variable costs to produce 125,000 dog collars = 125,000*$1.5 = $ 187,500

Total Production Cost = Fixed Cost + Variable Cost = $187,000+$50,000 = $237,000 (Answer D)

2.Breakeven Sales= Fixed Cost/Contribution p.u

Fixed Cost = Current Cost * 110%

=$212,500 * 110% = $233,750

Conribution Per Unit = Selling price- Variable Cost

= (125*125%) - 125*40%

=156.25-50 = $106.25

So Break Even Sales = $233,750/$106.25

=2,200 Units (Answer A)

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