Everclean Company cleans draperies. It charges $90 to clean a full-size drape, and its variable and fixed costs are $55 per drape and $10,000 per year, respectively. Given these data, if Everclean's fixed costs increased to $15,000, how many drapes must the firm clean to earn $60,000?

Question

Quizplus · Accepted Answer

First, we need to calculate the contribution margin per drape:
Contribution Margin (CM) = Price per drape – Variable costs per drape
CM = $90 - $55 = $35

Next, we can use the contribution margin per drape to calculate the number of drapes needed to earn $60,000 in profit:

$60,000 = (Contribution Margin per unit) x (Number of units) – Fixed costs
$60,000 = $35x - $15,000
$75,000 = $35x
x = 2,143

Therefore, Everclean needs to clean 2,143 drapes to earn $60,000 in profit given the new fixed cost of $15,000.

Everclean Company Cleans Draperies