A producer of felt-tip pens has received a forecast of demand of 33,000 pens for

Question

A producer of felt-tip pens has received a forecast of demand of 33,000 pens for the coming month from its marketing department. Fixed costs of $27,000 per month are allocated to the felt-tip operation, and variable costs are 25 cents per pen.

a. Find the break-even quantity if pens sell for $2 each. (Round your answer to the next whole number.)

b. At what price must pens be sold to obtain a monthly profit of $11,000, assuming that estimated demand materializes? (Round your answer to 2 decimal places. Omit the "$" sign in your response.)

Explanation / Answer

Ans:

Contribution per pen = selling price per pen - variable cost per pen

= $2 - $0.25

= $1.75

a) Break even quantity = fixed cost / contribution per pen

= $27,000 / $1.75

= 15429 pens

b) Price = (cost + profit) / quantity

= ((33,000 * $0.25) + $27,000 + $11,000) / 33,000

= ($8250 + $27,000 + $11,000) / 33,000

= $46250 / 33,000

= $1.40

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