Energetic Ltd, a sporting goods manufacturer, has recently created a new department to produce racquetball equipment. In the next period the department will manufacture a single product, an aluminium racquetball racquet, which has a unit selling price of $15. The variable costs per unit are $5 and the fixed costs per month are $10 000. The department has the capacity to produce 5000 units per month. Management would like to use the production facilities at full capacity and also yield a monthly profit of $30 000. 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 minimum unit price at which both objectives can be achieved is $13. This is calculated as follows:Selling price per unit = $15Variable cost per unit = $5Fixed costs per month = $10,000Capacity = 5,000 units per monthDesired profit = $30,000Contribution per unit = Selling price per unit - Variable cost per unit = $15 - $5 = $10Number of units to be sold to achieve desired profit = Desired profit / Contribution per unit = $30,000 / $10 = 3,000 unitsMinimum unit price to achieve full capacity and desired profit = Fixed costs per month / Number of units to be sold + Variable cost per unit = $10,000 / 3,000 + $5 = $13

Energetic Ltd, a Sporting Goods Manufacturer, Has Recently Created a New