Carol’s Flowers, a profit-seeking enterprise, is considering whether or not to p
ID: 422529 • Letter: C
Question
Carol’s Flowers, a profit-seeking enterprise, is considering whether or not to produce and sell a new product line of flowers in brown bags. Carol has has estimated a one-time cost of $3,000 to start a new production line for this product. Her marketing research projects first-year demand to range from 800 to 1,000 bags. Once the product is introduced, the first-year variable cost per flower bag will be $3.11, and each bag will be priced at $5.99. Carol needs to develop simple mathematical models to help make a decision whether or not she should move ahead with new product offering. Carol does not tolerate introduction of unprofitable product lines. What is the first-year break-even point expressed in the number of bags? (rounded up to the next whole number)
A. 1,042
B. 1,402
C. 330
D. 0
Explanation / Answer
Solution:
Fixed cost = $3,000
Variable cost = $3.11
Selling price = $5.99
At break-even point, the total cost of producing and selling the flower bags will be equal to the total revenue generated from the sale of flower bags.
Suppose the break-even quantity of flower bags produced and sold = x units
At break-even point,
Total cost = Total Revenue
Fixed cost + (Variable cost x Number of units) = (Selling price x Number of units)
Putting the given values in the above formula, we get;
$3,000 + $3.11 x = $5.99 x
$2.88 x = $3,000
x = 1,041.67 or 1,042 (Rounding off to the next whole number)
Break-even point = 1,042 bags
Answer: (A) 1,042