Question

Pastureland Dairy makes cheese, which it sells at local supermarkets. The fixed monthly cost of production is $4,000, and the variable cost per pound of cheese is $0.21. The cheese sells for $0.75 per pound; however, the dairy is considering raising the price to $0.95 per pound. The dairy currently produces and sells 9,000 pounds of cheese per month, but if it raises its price per pound, sales will decrease to 5,700 pounds per month. Should the dairy raise the price?

Answer 1

Answer:

The income and margin of safety decrease under the proposed scenario.

It should not raise the price to 0.95. It should analize for another price.

Explanation:

Analysis under the current scenario:

Income

(sales price - variable price ) x units sold - fixed cost = income

(0.75 - 0.21) x 9,000 - 4,000

0.54 x 9,000 - 4,000 = 860

Break even point:

4,000/0.54 = 7,407 pounds

Margin of Safety;

9,000 - 7,407 = 1,593 pounds

Analysis under the proposed scenario:

Income

(0.95-0.21) x 5,700 - 4,000 =

0.74 x 5,700 - 4,000 = 218

Break even point:

4,000/0.74 = 5,405

Margin of Safety:

5.700 - 5,405 = 295