Suppose You Are the Owner of a Picture Frame Store

question 45

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 $120.Also,suppose your current fixed costs (FC) total $32,000 (real estate taxes,interest on a bank loan,etc. ) and your current unit variable cost (UVC) for a picture frame is $40 (labor,glass,frame,and matting) .Now,suppose you decide to rent a machine for $18,000 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 total fixed costs from $32,000 to $50,000.However,it will also lower variable costs from $40 to $20 per unit.Now,with the new machine,what would your profit (or loss) be if you sold 2,000 picture frames?

• A)a loss of $32,000
• B)$0-only able to break-even
• C)$100,000 profit
• D)$108,000 profit
• E)$132,000 profit

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Definitions:

Secret Commission

A payment made to an individual for facilitating a transaction without the knowledge of all parties involved.

Entitled

Having a right or claim to something, often by law or through agreements.

Discovered

The act of finding something or someone that was previously unknown or hidden.

Duty to Act in Good Faith

A legal obligation requiring parties to act honestly and fairly towards each other within the bounds of a contract.