Wilkes Manufacturing sells one product with a variable unit cost of $18. The com

Question

Wilkes Manufacturing sells one product with a variable unit cost of $18. The company knows that the price charged will affect demand. Fixed costs are $275,000. If sales exceed 50,000 units, the company will need to lease additional manufacturing space and equipment at an additional cost of $100,000 per year.

The following chart represents the estimated demand at various price levels: Units Demanded Unit Price 25,000 $30 50,000 $28 75,000 $25 100,000 $23 Based on this information which of the following statements is true?

A. Selling the units at $23 will generate the largest profit.

B. Selling the units at either $23 or $28 will generate a profit of $225,000.

C. Selling the units at either $25 or $28 will generate a profit of $225,000.

D. Selling the units at $28 will generate the largest profit.

Explanation / Answer

Answer

D. Selling the units at $28 will generate the largest profit.

Explanation : Profit = [ ( selling price per unit - variable cost per unit) * units ] - Fixed Cost

Profit at $28 selling price = [ ($28 - $18) *  50,000 units ] - $275,000 = $225,000

Profit at $23 selling price = [ ($23 - $18) *  100,000 units ] - ($275,000 + $100,000) = $125,000

Profit at $25 selling price = [ ($25 - $18) *  75,000 units ] - ($275,000 + $100,000) = $150,000

Thus we can see that profit is largest at $28 per unit selling price

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