The Specialty Jewelry Company primarily produces
necklaces and rings. Recently, the firm’s management decided to introduce
a new ring that would identify the wearer’s birth month. Sales of this
ring are forecasted to be 800,000 units next year for the price level the
company would be charging in #2. A study of the firm’s costs indicate the
following:
Total fixed costs=$2,000,000
Average variable cost=$10 per unit
Answer each of the following
questions.
- If 800,000 units are sold
next year, what price must be established for the firm to break
even?
- If the firm desires to
make $1,000,000 on its investment, what price would it have to
charge?
- Rather than determine
price by looking at the answers generated in #1 and #2, Specialty
Jewelry adds 20% to total costs to determine final price. What would the
price per unit be?
- What is the unit
contribution if the price you calculated in #3 is used? What is the
total contribution (assuming demand would still be 800,000)?
- What are the expected
profits under the price established in question 3 (assuming demand is
still 800,000)?
- What information do we
not have in this case which would help us determine the
optimal price to charge (assuming that the AVC and thus MC
remains constant)?
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