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

Question

Quizplus · Accepted Answer

To calculate the profit or loss, we need to use the following formula:

Profit (or Loss) = Total Revenue - Total Cost

Total Revenue = Selling Price per Unit x Quantity Sold
Total Revenue = $120 x 2,000 = $240,000

Total Cost = Fixed Cost + (Unit Variable Cost x Quantity Sold)
Total Cost = $50,000 + ($20 x 2,000) = $90,000

Profit (or Loss) = $240,000 - $90,000 = $150,000

Since the profit is $150,000, the answer is D.

Suppose You Are the Owner of a Picture Frame Store