A producer of pottery is considering the addition of a new plant to absorb the b

Question

A producer of pottery is considering the addition of a new plant to absorb the backlog of demand that now exists. The primary location being considered will have fixed costs of $12,450 per month and variable costs of $1.16 per unit produced. Each item is sold to retailers at a price that averages $1.28

a) The volume per month is required in order to break even =  (in whole number)

b) The profit or loss would be realized on a monthly volume of 61,000 units =  

c) The volume is needed to obtain a profit of $16,000 per month =  (in whole number)

d) The volume is needed to provide revenue of $23,000 per month =  (in whole number)

Explanation / Answer

At breakeven pint,

Total revenue = Total cost

Let the volume = N per month

Therefore,

Total revenue per month = $1.28.N

Total cost per month = Fixed cost + Total variable cost = 12450 + 1.16.N

Since, Total revenue = Total cost

1.28.N = 12450 + 1.16.N

Or, 0.12.N = 12450

Or, N = 12450/0.12

Or, N = 103750

THE VOLUME PER MONTH REQUIRED IN ORDER TO BREAKEVEN = 103750

Let required volume = V

Profit = Total revenue – Total cost = 1.28.V – ( 12450 + 1.16.V) = 0.12.V – 12450

Given , V = 61,000 UNITS

Therefore,

Profit = 0.12 x 61000 – 12450 = 7320 – 12450 = - $ 5130

THE LOSS REALIZED ON A MONTHLY VOLUME OF 61,000 UNITS = - $5130

Profit = 0.12V – 12450

Given , Profit = $16,000 per month

Therefore ,

16000 = 0.12.V – 12450

Or, 0.12.V = 16000 + 12450

Or, 0.12.V = 28450

Or, V = 237083.33 ( 237083 rounded to nearest whole number )

VOLUME NEEDED TO OBTAIN PROFIT OF $16000 PER MONTH = 237083

Volume needed to obtain revenue of $23000 per month

= Revenue/ Price per unit

= $23000/$1.28

= 17968.75 ( 17969 rounded to nearest whole number )

VOLUM NEEDED TO OBTAIN REVENUE OF $23000 PER MONTH = 17969

THE VOLUME PER MONTH REQUIRED IN ORDER TO BREAKEVEN = 103750

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