Case Problems

1. The fixed cost for a product made by Grant Devices is $125,000.

And the variable cost is $5.00 per unit. Marketing specialists at Grant
Devices estimate potential sales of 50,000 units for a selling price of
$10.00 per unit. They also estimate that for every reduction of $0.50
in selling price, Grant can sell an additional 15% of the number at the
higher price; that is, if their selling price dropped to $9.50, Grant
could sell 57,500 units (50,000 x 1.15), and if the price dropped to
$9.00, they could sell 66,125 units (57,500 x 1.15).
(a) Compute the breakeven points and profits at each selling price.
Show both the table and graph.
(b) Which should be the selling price?

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2. Sta. Elena produces and sells wines. Their current capacity is
100,000 gallons a year.
Last year, they sold 100,000 gallons of wine, 12% of which were in
60-gallon barrels, 58% in 1-gallon jugs, and 30% in 0.2- gallon bottles.
The base selling price is $20 per gallon in barrels. The selling price for
wine in jugs per gallon is 25% higher, while that in bottles per gallon
is 40% higher.
Variable cost based on the selling price is 50% for barrels, 60% for
jugs, and 70% for bottles. The annual fixed expenses amount to
$500,000.
Management would like to know the breakeven quantity for each of
the three products, the net profit for the year, as well as what
strategy to implement to increase net profit, while keeping fixed
costs, and variable cost ratios constant.

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3. Factory workers at a company are paid a wage of $15 per hour. In addition, the
company pays benefits (vacation leave, sick leave, health insurance, etc.) equal to
75% of a worker’s base wage for a 40-hour week. Workers are paid 1.5 times the
hourly rate for any overtime hours worked in excess of 40 hours during a week, but
no additional benefits are paid for overtime work.
(a) How much wages will a worker receive for working 40, 42, 44, 46, 48, and 50
hours during a week? What would be the worker’s average hourly pay? Show both
in table and in graph form.
(b) What would be the company’s cost for a worker who works 40, 42, 44, 46, 48,
and 50 hours during the week? What would be the company’s average hourly
cost? Show both in table and graph form.
(c) What can you say about the worker’s average hourly pay compared to the
company’s average hourly cost? What are the implications?