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Bank 1: Level 2 Solutions A) i. A major publishing firm prints and sells statistics textbooks. The selling price of the book is $100 and the cost to print each book is $50. The firm can make a profit of $10,000 by selling 400 books. How many books does this firm need to sell to break-even? Variables: A Selling price: range from $80 to $120 B Cost to print each book: range from $20 to $60 C Profit: range from $2000 to $11,000 D From comes from selling how many books: range 300 to 500. Step 1: figuring out fixed costs: Required sales = Fixed Costs+ profit goal Unit Selling Price – Unit Variable 400 = X+ $10,000 fixed cost = $10,000 $100 – $50 Step 2: Break even Required sales = Fixed Costs+ profit goal Unit Selling Price – Unit Variable x = $10,000 = 200 books $100 – $50 ii. A Key Electronics makes and sells customer lap top computers. The firm can make a profit of $100,000 by selling 400 lap tops. The selling price is $1000 and the cost to make each lap top and ship it is $500. How many lap tops does this firm need to sell to break- even? Variables: A Selling price: range from $800 to $1200 B Cost to make each lap top: range from $200 to $500 C Profit: range from $20,000 to $120,000 D From comes from selling how many lap tops: range 300 to 500. Step 1: figuring out fixed costs: Required sales = Fixed Costs+ profit goal 1 Unit Selling Price – Unit Variable 400 = X+ $100,000 fixed cost = $100,000 $1000 – $500 Step 2: Break even Required sales = Fixed Costs+ profit goal Unit Selling Price – Unit Variable x = $100,000 = 200 lap tops $1000 – $500 B) i. A publishing firm prints and sells a new marketing textbook. The selling price is $100 and the cost to print each book is $50. The firm can break even by selling 400 books. By selling how many books must this firm sell to make $10,000 profit? Variables: A Selling price: range from $80 to $120 B Cost to make each engine: range from $20 to $60 C Breakeven number: range 300 to 500. D Profit: range $5000 to $10,000 Step 1: figuring out fixed costs: Required sales = Fixed Costs+ profit goal Unit Selling Price – Unit Variable 400 = X fixed cost = $20,000 $100 – $50 Step 2: Profit Required sales = Fixed Costs+ profit goal Unit Selling Price – Unit Variable x = $20,000 + $10,000 = 600 books $100 – $50 ii. A Key Electronics makes and sells customized palm pilots. The selling price is $100 and the cost to make each palm pilot is $50. The firm can break even by selling 400 palm pilots. By selling how many palm pilots must this firm sell to make $10,000 profit? Variables: A B C 2 D Selling price: range from $80 to $120 Cost to make each engine: range from $20 to $60 Breakeven number: range 300 to 500. Profit: range $5000 to $10,000 Step 1: figuring out fixed costs: Required sales = Fixed Costs+ profit goal Unit Selling Price – Unit Variable 400 = X fixed cost = $20,000 $100 – $50 Step 2: Profit Required sales = Fixed Costs+ profit goal Unit Selling Price – Unit Variable x = $20,000 + $10,000 = 600 palm pilots $100 – $50 C) i. IBM is trying to decide whether or not outsource the production of monitors. If they outsource the monitors, their fixed costs will be $100,000 per month and each monitor will cost them $100. If they make the monitors in-house their fixed costs will be $400,000 and the cost to make the monitors will be $20 per monitor. The price that they sell the monitors to retail stores is $200. Their demand is a constant 5000 monitors per month. How much profit would outsourcing the production of monitors have compared to in-house production? (Can be a negative or positive value) Variables: Outsource fixed costs: Range $50,000 to $200,000 A B Outsource cost per unit: Range $50 to $120 Inhouse fixed costs: Range $350,000 to $1,000,000 C Inhouse cost per unit: $10 to $25 D Retail store sales: $200 to $500 E F Demand 1000 to 20,000 Step 1 calculating profit from outsourcing and in-house options Outsource: Profits = $1,000,000- $600,000= $400,000; Revenue = $200 * 5000 = $1,000,000; Total Cost= $500,000 +$100,000= $600,000; Var costs = $100*5000 = $500,000 In-house: 3 Profits = $1,000,000- $500,000= $500,000; Revenue = $200 * 5000 = $1,000,000; Total Cost= $100,000 +$400,000= $500,000; Var costs = $20*5000 = $100,000 Step 2: Subtracting in-house profit from outsourcing Outsourcing profit- inhouse profit = $400,000-$500,000= -$100,000 ii. Casio is trying to decide whether or not outsource the production of Casio watches. If they make the watches in-house their fixed costs will be $180,000 and the cost to make the watches will be $.90 per watch. If they outsource the watches, their fixed costs will be $10,000 per month and each watch will cost them $4.50. The price that they sell the watches to retail stores is $5.00. Their demand is a constant 50,000 watches per month. How much profit would outsourcing the production of watches have compared to in- house production? (Can be a negative or positive value) Variables: Outsource fixed costs: Range $5000 to $20,000 A Outsource cost per unit: Range $2 to $4.5 B Inhouse fixed costs: Range $350,000 to $1,000,000 C Inhouse cost per unit: $.1 to $1 D Retail store sales: $5 to $20 E F Demand 10,000 to 200,000 Step 1: Determine profits of both ways Profits = Revenue- Total costs; Revenue = Price * Quantity; Total Cost= Variable costs +fixed costs; Var costs = unit cost*quantity Outsource Rev= $5* 50,000= $250,000; Var costs= 4.5*50,000= $225,000; Fixed cost = $10,000; Total costs $225,000+$10,000= $235,000; Profit = 250,000-$235,000= $15,000 Inhouse Rev= $5* 50,000= $250,000; Var costs= .9*50,000= $45,000; Fixed cost = $180,000; Total costs $45,000+$180,000= $225,000; Profit = 250,000-$225,000= $25,000 Step 2: Figure out which is more profitable Profit outsource- Profit make internally = $15,000- $25,000= -$10,000. D) i. A manufacturer had a total contribution of $2,000 selling hand held video game. Their total revenue was $3,000 and they sold 50 units. Their fixed costs were $5000. What is the variable cost of each hand held video game? 4 Variables A Total contributions: range $1000 to $2500 B Total revenue: range $3000 to $5000 C Number of units sold: Range 40 to 500 D Fixed costs (not actually used in equation): range $1000 to $100,000 Step 1: Total variable contribution Total contribution= total revenue –total variable cost $2,000= $3,000-X= $1,000 total variable costs Step 2: Variable cost of each unit Total variable costs =unit variable cost*units sold Total variable costs /units sold= unit variable cost Total variable costs= $1000/50 = $20 Variable cost per unit ii. A manufacturer had a total contribution of $1000 by selling desks. Their total revenue was $2,000 and they sold 50 units. What is the variable cost of each desk? Variables A Total contributions: range $500 to $1500 B Total revenue: range $2000 to $5000 C Number of units sold: Range 40 to 500 D Fixed costs: = 0 Step 1: Total variable contribution Total contribution= total revenue –total variable cost $1,000= $2,000-X= $1,000 total variable costs Step 2: Variable cost of each unit Total variable costs =unit variable cost*units sold Total variable costs /units sold= unit variable cost Total variable costs= $1000/50 = $20 Variable cost per unit E) i. A manufacturer had a total contribution of $2,000 selling hand held video game. Their unit contribution is $50. The selling price of each unit is $100. Their fixed costs were $5000. What is the total revenue? Variables A Total contributions: range $1000 to $2500 B C D 5 Selling price: range $30 to $500 Unit contribution: Range $50 to $250 Fixed costs (not actually used in equation): range $1000 to $100,000 Step 1: Number of units sold Total contribution=unit contribution*units sold Total contribution= $2000= $50*X = 40 Units sold= 40 Step 2: Total revenue Total revenue= unit revenue*units sold $100*40 = $4000 ii. Key Electronics had a total contribution of $2,000 selling portable televisions. Their unit contribution is $50. The selling price of each unit is $100. Their fixed costs were $5000. What is the total revenue? Variables A Total contributions: range $1000 to $2500 B Selling price: range $30 to $500 C Unit contribution: Range $50 to $250 D Fixed costs (not actually used in equation): range $1000 to $100,000 Step 1: Number of units sold Total contribution=unit contribution*units sold Total contribution= $2000= $50*X = 40 Units sold= 40 Step 2: Total revenue Total revenue= unit revenue*units sold $100*40 = $4000 6