The Precision Writing Instruments Company makes two pen designs - the Cordova design and the Savannah design. These data apply, regardless of which of two pen designs is being implemented. Materials cost per pen is $6. Labour cost per pen is $5. Production overhead is $1,000,000. Advertising and promotion is $1,000,000. Marketing research has estimated the following demand functions for the next year of sales for the two pen designs where Q represents demand in thousands and P represents price. For the Cordova design, Q = 150 - 2.5P. For the Savannah design, Q = 175 - 2.1P. What are the total costs for sales of 500,000 units of the Cordova design?
A)$3,650,000
B)$7,500,000
C)$5,500,000
D)$2,000,000

Question

Quizplus · Accepted Answer

The total cost includes materials and labor costs for 500,000 units, plus fixed production overhead and advertising costs. Total variable cost is (6+5) * 500,000 = $5,500,000. Adding fixed costs of $2,000,000 gives a total cost of $7,500,000.

The Precision Writing Instruments Company Makes Two Pen Designs -