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A. What is Molly’s current monthly volume?
Given that her fixed costs are $1,700 per month, variable costs are $0.25 per item and that she is charging $1.10 per item, we find her current monthly volume to be 2,000 Items. This is found in the following manner: 1700/(1.1-.25)=2000
B. If Molly purchases the new equipment, how many additional items will she have to dry-clean each month to break even?
I assume (from C) that the $16,200 will be broken up over 36 months. This adds $450/month to her fixed costs, bringing that to a total of $2,150 monthly. Given that, she would need to clean an additional 529 items. Formula here: 2150/(1.1-.25)-2000=529.412
C. Molly estimates that with the new equipment she can increase her volume to 4,300 items per month. What monthly profit would she realize with that level of business during the next 3 years? After 3 years?
Given that her costs do not change in the next 3 years, she can expect to see a monthly profit of $1,505 for the next three years. Formula: 4300(1.1-.25)-2150=1505
Once the new machinery is paid off and her fixed costs return to $1,700, her new monthly profit will be $1,955. Formula: 4300(1.1-.25)-1700=1955
D. Molly believes that if she doesn’t buy the new equipment but lowers her price to $0.99 per item, she will increase her business volume. If she lowers her price, what will her new break-even volume be? If her price reduction results in a monthly volume of 3,800 items, what will her monthly profit be?
Changing the price to $0.99 would increase her break-even volume to 2298. The equation for this is here: 1700/(.99-.25)=2297.297
The projected new monthly volume would result in $1,112 profit each month. This is found thusly: 3800(.99-.25)-1700=1112
E. Molly estimates that if she purchases the new equipment and lowers her price to $0.99 per item, her volume will increase to about 4,700 units per month. Based on the local market, that is the largest volume she can realistically expect.What should Molly...
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