A Small Business Owner Is Contemplating the Addition of Another

question 23

Essay

A small business owner is contemplating the addition of another product line. Capacity increases and equipment will result in an increase in annual fixed costs of $50,000. Variable costs will be $25 per unit.
(A) What unit selling price must the owner obtain to break even on a volume of 2,500 units a year?
(B) Because of market conditions, the owner feels a revenue of $47 is preferred to the value determined in part A. What volume of output will be required to achieve a profit of $16,000 using this revenue?

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Definitions:

Absorption Costing

An approach in accounting that integrates all costs associated with manufacturing, including direct materials, direct labor, and both variable and fixed overhead, into the product’s price.

Net Operating Income

A company's revenue minus its operating expenses, not including taxes and interest charges, indicating the profitability of its core business activities.

Fixed Manufacturing Overhead

Costs that do not vary with the level of production or sales, such as salaries of managers, depreciation of manufacturing equipment, and rent of the factory building.

Deferred in Inventories

A situation where costs incurred in acquiring or producing inventory are postponed from being recognized as expenses until the goods are sold.