Smitty's Smoothies has fixed costs of $1,600 per month. The only variable costs Smitty incurs are for the ingredients and labor needed to produce smoothies. These costs are $1.50 per drink. Smitty' Smoothies sells its delicious concoctions for $3.50 each. Which of the following statements is correct?
A) Smitty's will be able to earn a profit if it can sell more than 400 smoothies each month.
B) In order to break even, Smitty's must sell at least 800 smoothies each month.
C) In order to stay in business, Smitty's must reduce its price to at least $3.00 per smoothie.
D) Smitty's will maximize its profits at a sales volume of 560 smoothies per month.

Question

Quizplus · Accepted Answer

To calculate the break-even point, we need to find the number of smoothies Smitty's needs to sell to cover its fixed and variable costs.

Let x be the number of smoothies sold.
Revenue = 3.5x
Variable costs = 1.5x
Fixed costs = $1,600

To break even, revenue = variable costs + fixed costs.
3.5x = 1.5x + 1,600
2x = 1,600
x = 800

Therefore, Smitty's must sell at least 800 smoothies each month to break even. Option B is correct.

Option A is incorrect because Smitty's could earn a profit by selling fewer than 400 smoothies as long as the revenue from those sales covers both variable and fixed costs.

Option C is incorrect because a lower price would decrease revenue, making it more difficult to cover fixed and variable costs.

Option D is incorrect because we do not have enough information to determine the sales volume at which Smitty's will maximize its profits. It depends on factors such as competition and consumer demand.

Smitty's Smoothies Has Fixed Costs of $1,600 Per Month