Texas Products Inc. has a division, which makes burlap bags for the citrus industry. The unit has fixed costs of $10,000 per month, and it expects to sell 42,000 bags per month. If the variable cost per bag is $2.00, what price must the division charge in order to break even?
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A. B. C. D. E.Explanation
Total costs = $10,000 + $2(42,000) = $94,000.
Price = $94,000/42,000 = $2.24.
To determine the price the division must charge in order to break even, we need to consider the fixed costs, variable costs, and the number of bags expected to be sold.
Fixed costs are the costs that do not vary with the number of bags produced. In this case, the fixed costs are given as $10,000 per month.
Variable costs are the costs that vary with the number of bags produced. The variable cost per bag is given as $2.00.
The number of bags expected to be sold is given as 42,000 bags per month.
To break even, the total revenue generated must cover both the fixed costs and the variable costs.
Let's calculate the total costs first:
Total fixed costs = $10,000
Total variable costs = Variable cost per bag × Number of bags sold = $2.00 × 42,000 = $84,000
Total costs = Total fixed costs + Total variable costs = $10,000 + $84,000 = $94,000
To determine the price the division must charge to break even, we divide the total costs by the number of bags sold:
Price per bag = Total costs / Number of bags sold = $94,000 / 42,000 = $2.24
Therefore, the division must charge a price of $2.24 per bag in order to break even.
The correct answer is C. $2.24.