PugetBrick produces an eight-sided garden path brick that normally sells for $12

Question

PugetBrick produces an eight-sided garden path brick that normally sells for $120. The company produces 8000 units annually but has the capacity to produce 11,000 units. Current unit costs for the 8000 bricks are as follows: Unit cost Direct materials 23.00 Direct labor 45.00 Variable overhead 7.00 Fixed overhead 12.00 Total cost per brick 87.00 Required (a): What price should PugetBrick charge to maximize profits based on the following sales (demand) estimate: (show calculation) Units Demanded Unit Price 6,000 $130 7,000 125 8,000 120 9,000 115 10,000 110 11,000 105 Required (b): if there is a tie in profit for two prices, what factors should the company consider to choose the preferred selling price?

Explanation / Answer

PugetBrick a Sales Demand 6000 7000 8000 9000 10000 11000 Selling price 130 125 120 115 110 105 Sales Revenue 780000 875000 960000 1035000 1100000 1155000 Less : Variable cost Unit cost Direct Materials 23 138000 161000 184000 207000 230000 253000 Direct Labor 45 270000 315000 360000 405000 450000 495000 Variable overhead 7 42000 49000 56000 63000 70000 77000 Total variable cost 75 450000 525000 600000 675000 750000 825000 Contribution/Margin 330000 350000 360000 360000 350000 330000 Less : Fixed cost Considering 8000 to be normal Production 12 96000 96000 96000 96000 96000 96000 Profit 234000 254000 264000 264000 254000 234000 Prices at which co. should sell as they have maximum profit b In case of tie in profit, Company should sell products with lower units as it may produce higher units and sells difference in units in future if there is demand for the same in the market. Note : In the absense of specific information about normal capcity at which fixed overhead are absorbed, we have considered the 8000 units. Alternately, we can assume the normal capacity of 11000 units. But, then also our answer will not change.

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