Chapter 1, Problem 1P

a.

Summary Introduction

To Compute: Total cost, total revenue and total profit.

Introduction: Total cost is the result of summation of ‘variable cost’ and ‘fixed cost’. To calculate the total cost, the sum of ‘variable cost’ and ‘fixed cost’ is multiplied with the number of units, that is, volume.

Explanation of Solution

Given information:

It is given that the fixed monthly cost is $8,000, variable cost is $65, monthly volume is 300 tables and the selling price is $180 per piece.

Determine the total cost, total revenue and total profit:

Total cost to produce tables:

Total cost if the total of the ‘variable cost’ and ‘fixed cost’. The formula to calculate Total cost is as follows:

$\begin{array}{c}\text{Total cost}=\text{Fixed cost}+\text{Variable cost}\\ =\$8,000+\$19,500\\ =\$27,500\end{array}$

Total cost is calculate by adding the fixed cost and variable cost. Variable cost is calculated by multiplying per unit variable cost by monthly volume.

Total revenue from selling the tables:

Total revenue is the revenue earned by selling the units. The formula to calculate total revenue is as follows:

$\begin{array}{c}\text{Total revenue}=\text{Monthly volume}\times \text{selling price per piece}\\ =300\times \$180\\ =\$54,000\end{array}$

Total revenue is the revenue earned by selling the units produced. To calculate the total revenue monthly sales volume is multiplied with selling price per piece.

Total profit from selling the tables:

The profit is the difference of the ‘total revenue’ and ‘total cost’. The formula to calculate total profit is as follows:

$\begin{array}{c}\text{Total profit}=\text{Total revenue}-\text{total cost}\\ =\$54,000-\$27,500\\ =\$26,500\end{array}$

Working Note:

Calculation of variable cost:

$\begin{array}{c}\text{Variable cost}=\text{sales volume}\times \text{variable cost per unit}\\ =300\times \$65\\ =\$19,500\end{array}$

b.

Summary Introduction

To compute: The monthly break-even sales volume.

Explanation of Solution

Given information:

It is given that the fixed cost is $8,000, variable cost is $65 and the selling price per piece is $180.

Determine the break-even volume for the willow furniture company:

At break-even volume, the ‘total revenue’ and ‘total cost’ are equal and it is a situation where there is neither profit for the organization nor loss.

Formula to calculate break-even volume, denoting the volume as ‘v’, is as follows:

$\begin{array}{c}\text{Profit}=\text{v}\left(\text{selling price}\right)-\text{fixed cost}-\text{v}\left(\text{variable cost}\right)\\ 0=\text{v}\left(\$180\right)-\$8,000-\text{v}\left(\$65\right)\\ 0=\$180\text{v}-\$8,000-\$65\text{v}\\ \$8,000=\$180\text{v}-\$65\text{v}\\ \$8,000=\$115\text{v}\\ \text{v}=\frac{\$8,000}{\$115}\\ \text{v}=70\text{ piece (approximately)}\end{array}$