High School

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Part 1: Profitability

Consider a product with the following information:
- Price per unit = $10.00
- Variable Cost per unit = $5.00
- Total Fixed Costs = $1,000.00

Use this information to answer the following questions:
1. If we sell 500 units of this product next month, how much revenue will we bring in?
2. What will our gross profits be for next month?
3. What is our gross margin next month?
4. Suppose we are only able to sell 400 units next month. How much gross profit will we make then?
5. Suppose since we expect to only sell 400 units, we increase the price to $12.00 per unit. How much gross profit will we make then?

Breakeven

Maxwell’s Lemonade Stand charges $5.00 per glass of lemonade. It costs Maxwell $2.00 in materials to make a cup of lemonade, plus a weekly licensing fee of $90.00.

1. What is Maxwell’s contribution per glass of lemonade?
2. How many glasses of lemonade does Maxwell need to sell per week to break even?
3. For the past year, Maxwell has averaged 50 glasses of lemonade per week. How much gross profit is he making?
4. A competitor in Maxwell’s market just started offering lemonade service for $4.50 a glass. Maxwell is feeling pressure to lower his price to $4.50 to stay competitive. If he lowers his price to $4.50, and his average unit sales continue to be 50 glasses per week, what will his gross profit be?
5. How many lemonades per week would Maxwell need to average to break even at $4.50 per glass of lemonade?

Answer :

If we sell 500 units of this product next month, we will bring in $5,000 in revenue. Our gross profits will be $2,000 for next month.

Our gross margin next month will be 40%.

If we are only able to sell 400 units next month, we will make a gross profit of $1,200.

If we increase the price to $12.00 per unit and only sell 400 units, we will make a gross profit of $1,600.

Breakeven Maxwell's contribution per glass of lemonade is $3.00.

Maxwell's needs to sell 30 glasses of lemonade per week to break even.

Maxwell is currently making a gross profit of $100 per week.

If Maxwell lowers his price to $4.50 per glass and keeps his average unit sales at 50 glasses per week, his gross profit will be $0.

Maxwell would need to average 60 glasses of lemonade per week to break even at $4.50 per glass. The gross profit is calculated by subtracting the variable costs from the total revenue. The gross margin is the percentage of the total revenue that is profit. The breakeven point is the number of units that need to be sold in order to cover all of the fixed costs.

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