Marketing has forecast that at almost any reasonable price annual demand for a n
ID: 384429 • Letter: M
Question
Marketing has forecast that at almost any reasonable price annual demand for a new product will be for 8000 units. Production of this product will generate $12000 per year in fixed costs, with a variable cost per unit of $5.25. At what minimum price would producing/selling this item become a profitable endeavor?
A) Not in excess of $4.25
B) In excess of $4.25 but not in excess of $6.50
C) In excess of $6.50 but not in excess of $8.75
D) In excess of $8.75 but not in excess of $11
E) In excess of $11
Explanation / Answer
The threshold price at which producing/ selling this item become a profitable endeavour is the one at which Total Revenue earned = Total cost incurred
Let the threshold price = $ P / unit
Annual demand = 8000 units
Therefore, total revenue = $8000.P
Total cost for 8000 units
= Fixed cost + Variable cost / unit x 8000 units
= $ 12000 + 5.25 x 8000
= $12,000 + $42,000
= $54,000
Since. Total revenue = Total cost
Therefore , 8000 .P = 54,000
Or, P = 54,000/8,000 = $6.75 / UNIT
Therefore , answer would be “C. In excess of $6.50 but not in excess of $8.75”