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

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Definitions:

Bartering

The exchange of goods or services between parties without the use of money as a medium of exchange.

Reduces

Involves decreasing the amount, size, cost, or number of something in order to achieve efficiency or effectiveness.