A company produces 1,000 packs of chicken feed per month. Sales price is $4 per pack. Variable cost is $1.50 per unit, and fixed costs are $1,800 per month. Management is considering adding a vitamin supplement to improve the value of the product. The variable cost will go up from $1.50 to $1.90 per unit, and fixed costs will go up by 20%. The CEO wants to price the new product at a level which will bring operating income up to $1,000 per month. What price is to be charged?

Question

Quizplus · Accepted Answer

First, let's calculate the current operating income:
Revenue = 1,000 packs x $4/pack = $4,000
Variable Cost = 1,000 packs x $1.50/pack = $1,500
Fixed Cost = $1,800
Operating Income = Revenue - Variable Cost - Fixed Cost = $4,000 - $1,500 - $1,800 = $700

Now, let's calculate the operating income with the new supplement:
Revenue = 1,000 packs x $x/pack (to be determined) = $x
Variable Cost = 1,000 packs x $1.90/pack = $1,900
Fixed Cost = $1,800 x 1.2 = $2,160
Operating Income = Revenue - Variable Cost - Fixed Cost = $x - $1,900 - $2,160 = $-3,060

To bring the operating income up to $1,000, we can use the following formula:
Operating Income = Revenue - Variable Cost - Fixed Cost = $1,000
$x - $1.90 x 1,000 - $2,160 = $1,000
$x = ($1.90 x 1,000 + $2,160 + $1,000) / 1,000 = $4.95

However, we need to charge a price that brings in this revenue per pack:
$4.95 = $4 + Vitamin Supplement Price
Vitamin Supplement Price = $0.95

Therefore, the new price should be $4 + $0.95 = $4.95.

The closest option is B) $5.06.

A Company Produces 1,000 Packs of Chicken Feed Per Month