Suppose You Are the Owner of a Picture Frame Store

question 59

Multiple Choice

Suppose you are the owner of a picture frame store and you wish to calculate how many pictures you must sell to cover your fixed and variable costs at a given price.Let's assume that the demand for your pictures is strong,so the average price customers are willing to pay for each picture frame is $125.Also,suppose your current fixed costs (FC) total $50,000 (real estate taxes,interest on a bank loan,etc. ) and your current unit variable cost (UVC) for a picture frame is $50 (labor,glass,frame,and matting) .Now,suppose you decide to rent a machine for $25,000 that will speed up production so that you can guarantee that you could sell 2,000 picture frames.The new machine allows you to: (1) key in the dimensions needed to cut the frame,glass,and matting for any picture frame size; (2) reduce losses in miscut glass and mats;and (3) automate the production process to dramatically increase the output of framed pictures.This new technology will increases fixed costs from $50,000 to $75,000.However,it will also lower variable costs from $50 to $25 per unit.Now,with the new machine,what will your profit (or loss) be if you sold 2,000 picture frames?

• A)a loss of $75,000
• B)$0-only able to break-even
• C)$50,000 profit
• D)$75,000 profit
• E)$125,000 profit

---

Definitions:

Net Operating Income

A company's income after operating expenses have been subtracted but before interest and taxes have been deducted.

Total Sales

The total revenue a company generates from selling its goods or services within a specific period.

Return On Investment

A performance measure used to evaluate the efficiency or profitability of an investment relative to its cost.

Minimum Required Rate

The lowest rate of return or discount rate that investors are willing to accept before investing in a project or financial asset.