Tory Company sells a single product. Troy estimates demand and costs at various
ID: 2748557 • Letter: T
Question
Tory Company sells a single product. Troy estimates demand and costs at various activity levels as follows:
Units Sold
Price
Total Variable Costs
Fixed Costs
120,000
$48
$3,000,000
$1,000,000
149,500
$45
$3,520,000
$1,000,000
160,000
$40
$4,000,000
$1,000,000
180,000
$35
$4,500,000
$1,000,000
200,000
$30
$5,000,000
$1,000,000
How much profit will Troy have if a price of $45 is charged?
Units Sold
Price
Total Variable Costs
Fixed Costs
120,000
$48
$3,000,000
$1,000,000
149,500
$45
$3,520,000
$1,000,000
160,000
$40
$4,000,000
$1,000,000
180,000
$35
$4,500,000
$1,000,000
200,000
$30
$5,000,000
$1,000,000
Explanation / Answer
Answer:
First of All if taking the figure from above table, it is clear that at selling price of $45 demand is 149,500 Units
So the Profit = Sales - (Variable Cost + Fixed Cost) = (149,500 x 45) - ($3,520,000 + $1,000,000) = $2,207,500
But after analyzing all the table above, it is found that variable cost per unit mentioned under demand 149,500 is incorrect.
Variable Cost Per Unit is coming under all the above demand is $25
Variable Cost per Unit when demand is 200,000 = $5,000,000 / 200,000 = $25
Variable Cost per Unit when demand is 180,000 = $4,500,000 / 180,000 = $25
and so on...
Therefore, It is the nature of Variable Cost that variable cost per unit is remained same irrecpective of level of output in normal condition.
So by applying variable cost per unit $25, the profit will be as follows:
Profit = (149,500 x $45) - (149,500 x 25 + $1,000,000) = $6,727,500 - ($3,737,500 + $1,000,000) = $6,727,500 - $4,737,500 = $1,990,000