Garden Corporation uses cost-plus pricing with a 30% mark-up.The company is currently selling 12,000 units at $21.45 per unit.Each unit has a variable cost of $11.50.In addition, the company incurs $60,000 in fixed costs annually.If demand falls to 10,000 units, how much will the company have to charge per unit in order to earn the same annual profit?
A)$22.45
B)$21.45
C)$23.44
D)$22.75

Question

Quizplus · Accepted Answer

First, let's find out how much profit the company is currently earning at 12,000 units:

Revenue = 12,000 units x $21.45 per unit = $257,400
Total variable cost = 12,000 units x $11.50 per unit = $138,000
Total cost = Total variable cost + Fixed cost = $198,000 ($138,000 + $60,000)
Profit = Revenue - Total cost = $257,400 - $198,000 = $59,400

Now, let's find out how much revenue the company would need to earn with 10,000 units in order to earn the same profit:

Profit = Revenue - Total cost
$59,400 = R - ($11.50 x 10,000 + $60,000)
$59,400 = R - $175,000
R = $234,400 (revenue needed to earn the same profit with 10,000 units)

Finally, let's use cost-plus pricing to find out how much the company would have to charge per unit:

Unit cost = Variable cost + (Fixed cost / units sold) 
Unit cost = $11.50 + ($60,000 / 10,000) = $17.50 per unit
Mark-up percentage = 30%
Mark-up amount = $17.50 x 0.30 = $5.25
Selling price = Unit cost + Mark-up amount = $17.50 + $5.25 = $22.75 per unit

Therefore, the company would have to charge $22.75 per unit in order to earn the same annual profit with 10,000 units. Answer: D

Garden Corporation Uses Cost-Plus Pricing with a 30% Mark-Up