Week 3 Chapter Questions - 9.06.11

# Operations and Supply Chain Management (The Mcgraw-Hill/Irwin Series)

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Chapter 6: Problem 1 & 6 Problem 1: Owen Conner works part-time packaging software for a local distribution company in Indiana. The annual fixed cost is \$10,000 for this process, direct labor is \$3.50 per package, and material is \$4.50 per package. The selling price will be \$12.50 per package. How much revenue do we need to take in before breaking even? What is the break-even point in units? Solution: Selling Price p.u = \$12.50 Less: Material p.u = \$ 4.50 Less: Direct labor = \$3.50 Contribution \$4.50 Fixed cost = \$10,000 Break Even (units) = \$10,000/\$4.50 = 2,223 units Break Even Revenue = 2,223*12.50 = \$27,787.50 Problem 6: A book publisher has fixed costs of \$300,000 and variable costs per book of \$8.00. The book sells for \$23.00 per copy. a. How many books must be sold to break even? Contribution p.u = \$23-\$8 = \$15 Fixed cost = \$300,000 Break even units = 300,000/15 = 20,000 units b. If the fixed cost increased, would the new break-even point be higher or lower? If the fixed cost will be increased the breakeven point will be higher as the firm will need to sale more units to cover the fixed cost.

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