Query Company Sells Pillows for $25

question 114

Essay

Query Company sells pillows for $25.00 each.The manufacturing cost, all variable, is $10 per pillow.The company is planning on renting an exhibition booth at the annual crafts and art convention.The convention coordinator allows three options for each participating company.They are:
1.paying a fixed booth fee of $5,010, or;
2.paying an $4,000 fee plus 10% of revenue made at the convention, or;
3.paying 20% of revenue made at the convention.Required:
a.Compute the break-even sales in pillows of each option.
b.Which option should Query Company choose, assuming sales are expected to be 800 pillows?
c.Calculate the margin of safety for Option 1 if sales are expected to be 300 pillows.

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Definitions:

Average Variable Cost

The cost a company incurs for each unit of output, which changes with the level of production, excluding fixed costs.

ATC

Abbreviation for “Average Total Cost,” reflecting the total cost of production divided by the number of goods produced, in economic terms.

MC

Stands for Marginal Cost, which is the increase or decrease in the total cost that arises from producing one additional unit of a product.

Variable Cost

Expenses that vary directly with the volume of products or services a company generates.