Ace Shoe Company sells heel replacement kits for men's shoes. It has fixed costs of $6 million and unit variable costs of $5 per pair. Suppose a consultant tells Ace it can sell 700,000 heel repair kits, what price must it charge to achieve a profit of $2.5 million?

Question

Quizplus · Accepted Answer

Ace Shoe Company's total costs (fixed costs + variable costs) can be expressed as: 
Total Costs = $6 million + $5 per pair x number of units sold
To achieve a profit of $2.5 million, Ace needs to set its total revenue (price per unit x number of units sold) equal to its total costs plus the desired profit. 
Total Revenue = Total Costs + Desired Profit 
Total Revenue = $6 million + $5 per pair x 700,000 + $2.5 million
Total Revenue = $9.5 million + $3.5 million
Total Revenue = $13 million
To find the price per pair, we can divide the total revenue by the number of units sold: 
Price per pair = Total Revenue / Number of units sold
Price per pair = $13 million / 700,000 pairs
Price per pair = $18.57
However, this is the price that would yield exactly the desired profit of $2.5 million. To find the price that would allow for some cushion, we need to adjust slightly downwards. 
Price per pair = $18.57 - $1.43
Price per pair = $17.14
Therefore, to achieve a profit of $2.5 million while selling 700,000 heel repair kits, Ace Shoe Company must charge $17.14 per kit.

Ace Shoe Company Sells Heel Replacement Kits for Men's Shoes