A company produces 1000 packs of chicken feed per month.Sales price is $5 per pack.Variable cost is $1.60 per unit and fixed costs are $1800 per month.Management is considering adding a vitamin supplement to improve the value of the product.The variable cost will go up from $1.60 to $1.70 per unit and fixed costs will go up by 10%.The CEO wants to price the new product at a level which will bring operating profit up to $3000 per month.What price is to be charged?

Question

Quizplus · Accepted Answer

To find the new price that will bring operating profit up to $3000, we need to use the following formula:

Operating profit = (Price - Variable cost) x Quantity - Fixed costs

Let's first calculate the operating profit without the vitamin supplement:

Operating profit = ($5 - $1.60) x 1000 - $1800 = $2600

Now let's calculate the operating profit with the vitamin supplement:

Variable cost with supplement = $1.70
Fixed costs with 10% increase = $1800 x 1.1 = $1980

We need to find the new price that will bring the operating profit up to $3000:

$3000 = (Price - $1.70) x 1000 - $1980

Simplifying this equation, we get:

Price = ($3000 + $1980)/1000 + $1.70 = $4.98 + $1.70 = $6.68

Therefore, the best choice is C, $6.68.

A Company Produces 1000 Packs of Chicken Feed Per Month