Texas Products Inc.has a division which makes burlap bags for the citrus industry.The unit has operating fixed costs of $10,000 per month,and it expects to sell 42,000 bags per month.If the variable cost per bag is $2.00,what price must the division charge in order to break even?

Question

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Explanation:To break even, the division must charge a price that covers its total costs. Total costs are equal to fixed costs plus variable costs. Fixed costs are $10,000 per month, and variable costs are $2.00 per bag. Therefore, total costs are $10,000 + (2.00 * 42,000) = $94,000 per month. To break even, the division must charge a price that generates $94,000 in revenue. Revenue is equal to price times quantity, so the division must charge a price of $94,000 / 42,000 = $2.24 per bag.