Crystal has received a special order for 2,000 units of its product. The product normally sells for $200 and has the following manufacturing costs: Crystal is currently operating at full capacity and cannot fill the order without harming normal production and sales. What minimum price should Crystal charge to earn an incremental profit of $50,000?
A) $175
B) $200
C) $225
D) $155

Question

Crystal has received a special order for 2,000 units of its product. The product normally sells for $200 and has the following manufacturing costs:  Crystal is currently operating at full capacity and cannot fill the order without harming normal production and sales. What minimum price should Crystal charge to earn an incremental profit of $50,000?
A) $175 
B) $200 
C) $225 
D) $155

Quizplus · Accepted Answer

To calculate the minimum price, we need to first determine the total cost of manufacturing 2,000 units:

Total manufacturing cost = 2,000 units × ($50 variable cost + $70 fixed cost) 
                          = $240,000

To earn an incremental profit of $50,000, Crystal needs to generate total revenue of:

Total revenue = Incremental profit + Total manufacturing cost 
                     = $50,000 + $240,000 
                     = $290,000

To find the minimum price, we divide the total revenue by the number of units:

Minimum price = Total revenue / Number of units 
                      = $290,000 / 2,000 
                      = $145

However, this price does not cover the normal profit margin, which is $200 - $120 = $80. To ensure that the incremental profit is earned without harming regular sales, the minimum price should cover both the incremental profit and the normal profit margin:

Minimum price = Incremental profit per unit + Normal profit per unit + Variable cost per unit 
                      = $50,000 / 2,000 + $80 + $50 
                      = $25 + $80 + $50 
                      = $155

Therefore, the minimum price that Crystal should charge is $155, which means that choice (D) is correct. The other answer choices are not accurate, as they do not account for the normal profit margin and the variable cost per unit.

Crystal Has Received a Special Order for 2,000 Units of Its