Nov 26, 2020 in Coursework

Week 2 Assignment 2

Answer to Question 1.

Assumption 1: Variable costs are considered linear with respect to the output.

Assumption 2: Advertising and Travel are considered as fixed costs.

Total Variable Cost per Unit

Total Fixed Costs

Items

Total unit

Cost for total unit

Cost for one unit

Items

Fixed costs

Materials

100,000

180,000

1.8

Manufacturing

45,000

Labor

100,000

225,000

2.25

Advertising

10,000

Delivery

100,000

30,000

0.3

Travel

5,000

Commissions

100,000

50,000

0.5

Admin

15,000

Total Variable Cost per Unit

4.85

Total fixed cost

75,000

Profit calculation for various combinations

Price

Quantity

Total Revenue

Variable cost per unit

Total Variable Cost

Total Fixed Cost

Total Cost

Profit

8.00

65,000

520,000

4.85

315,250

75,000

390,250

129,750

7.75

75,000

581,250

4.85

363,750

75,000

438,750

142,500

7.50

80,000

600,000

4.85

388,000

75,000

463,000

137,000

7.25

90,000

652,500

4.85

436,500

75,000

511,500

141,000

7.00

100,000

700,000

4.85

485,000

75,000

560,000

140,000

6.75

115,000

776,250

4.85

557,750

75,000

632,750

143,500

6.50

120,000

780,000

4.85

582,000

75,000

657,000

123,000

Answer to Question 2.

Production costs and sales revenue relationships are associated with four variables: fixed cost, variable cost, total cost, and sales revenue. Graphically this concept is displayed in Break-even point vs. Total sales. We used Golden Star Winery sales revenue data to plot this graph. The point of intersection of the total cost and sales revenue curves is called break-even point (Ready Ratios). This is displayed in the said graph. The break-even point denotes that values of cost and revenue from sales are even. In other words, there is a loss and no profit. The formula for calculation of break-even point is image2.wmfBreak-even point = Fixed cost x (Sales price Variable cost per unit).

For current sales price $7 per unit the break-even point is

Break-even point = 75,000 (7 4.85) = 34,884 units. The cost and revenue are $244,186. It is shown in Figure 1. We inform the winery that if they produce less than 34,884 units at sales price $7 per unit then the company will sustain losses (See Figure 1).

Figure 1. Break-even point at sales price $7 per unit.

Answer to Question 3.

The concept of elasticity is a numerical value that expresses the relative response of one variable to the changes in another variable (Amos Web n.d.). In this case, we have two variables: sales price and quality sold. Through elasticity coefficient we can study the impact of demand on the price increase or decrease. This is called price elasticity of demand.

It is expressed as,

Coefficient of demand elasticity = Percent change in quantity demanded / Percent change in price, or Ed = ? Qd / ? Pd.

This assignment evaluates price elasticity of demand of Golden Star Winery product.

Price

Quantity

Elasticity

6.50

120,000

6.75

115,000

2.45

7.00

100,000

3.41

7.25

90,000

3.22

7.50

80,000

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