Sports Equipment Ltd, a sporting goods manufacturer, has recently created a new department to produce badminton equipment. In the next period the department will manufacture a single product, an aluminium badminton racquet, which has a unit selling price of $18. The variable costs per unit are $6 and the fixed costs per month are $8 000. The department has the capacity to produce 5 000 units per month. Management would like to use the production facilities at full capacity and also yield a monthly profit of $20 000. Assuming demand can be increased by reducing the selling price, calculate the minimum unit price at which both these objectives can be achieved.

Question

Quizplus · Accepted Answer

The department has a capacity to produce 5,000 units per month, and the variable cost per unit is $6, which means the total variable cost for producing 5,000 units is:

Total variable cost = 5,000 × $6 = $30,000

The fixed cost incurred per month is $8,000.

To achieve a profit of $20,000 per month, the total revenue must be:

Total revenue = Total variable cost + Fixed cost + Desired profit
Total revenue = $30,000 + $8,000 + $20,000 = $58,000

Since the selling price per unit is an unknown variable, let's assume it as S.

So, the equation becomes:

Total revenue = Selling price × Number of units
$58,000 = S × 5,000
S = $11.60

Therefore, the minimum unit selling price to achieve a monthly profit of $20,000 and utilize the production capacity is $11.60 which is option B.

Sports Equipment Ltd, a Sporting Goods Manufacturer, Has Recently Created