Andrew is interested in entering the catfish farming business.He estimates if he enters this business,his fixed costs would be $50,000 per year and his variable costs would equal 30 percent of sales.If each catfish sells for $2,how many catfish would Andrew need to sell to generate a profit that is equal to 10 percent of sales?
A)40,000
B)41,667
C)35,000
D)No level of sales can generate a 10 percent net return on sales.

Question

Quizplus · Accepted Answer

First, we need to determine the total costs per catfish:

Variable costs per catfish = 30% x $2 = $0.60

Total costs per catfish = fixed costs per year / number of catfish produced per year + variable costs per catfish

Assuming Andrew wants to make a profit of 10% of sales, his target profit per catfish is:

Target profit per catfish = 10% x $2 = $0.20

We can set up the following equation to solve for the number of catfish Andrew needs to sell:

$2 - $0.60 - $0.20 = $1.20 / catfish

Total costs per catfish = $50,000 / number of catfish produced per year + $0.60

$1.20 / catfish = $50,000 / number of catfish produced per year + $0.60

$1.20 - $0.60 = $50,000 / number of catfish produced per year

$0.60 = $50,000 / number of catfish produced per year

Number of catfish produced per year = $50,000 / $0.60 = 83,333

To achieve a 10% net return on sales, Andrew would need to sell:

83,333 x $2 x 110% = $183,332 worth of catfish

Number of catfish = $183,332 / $2 = 91,666.

However, this exceeds the maximum number of catfish that Andrew can produce:

83,333 / year

Therefore, the closest and best answer is B, 41,667.

Andrew Is Interested in Entering the Catfish Farming Business