A company produces 1000 packs of chicken feed per month.Sales price is $5 per pack.Variable cost is $1.50 per unit and fixed costs are $1700 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 $1.80 per unit and fixed costs will go up by 20%.At what price for the new product will the two alternatives (sell as is or process further)produce the same operating income? Round to nearest cent.

Question

Quizplus · Accepted Answer

First, let's find the total profit for the current product:

Revenue = 1000 x $5 = $5000
Variable cost = 1000 x $1.50 = $1500
Fixed cost = $1700
Total cost = Variable cost + Fixed cost = $1500 + $1700 = $3200
Profit = Revenue - Total cost = $5000 - $3200 = $1800

Now, let's find the total profit for the new product:

Revenue = 1000 x Price
Variable cost = 1000 x $1.80 = $1800
Fixed cost = $1700 x 1.2 = $2040
Total cost = Variable cost + Fixed cost = $1800 + $2040 = $3840
Profit = Revenue - Total cost

For the two alternatives to produce the same operating income, we need to set the profit of the new product equal to the profit of the current product:

1000 x Price - $3840 = $1800
1000 x Price = $5640
Price = $5.64

Therefore, the best choice is to process further and sell the new product for $5.64.

A Company Produces 1000 Packs of Chicken Feed Per Month