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A manufacturer produces items for which the annual fixed cost of produ

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A manufacturer produces items for which the annual fixed cost of produ  [#permalink]

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New post 08 Jan 2018, 07:27
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A manufacturer produces items for which the annual fixed cost of production totals $25,000. If during one year the manufacturers variable costs per item decreases by $1 and the fixed costs increase by 10 percent, what is the net change in the manufacturer's total profit if the manufacturer continues to sell 5000 units annually at the same price?

A. $7,500 increase
B. $5,000 increase
C. $2,500 increase
D. No change
E. $2,500 decrease

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Re: A manufacturer produces items for which the annual fixed cost of produ  [#permalink]

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New post 08 Jan 2018, 10:56
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Bunuel wrote:
A manufacturer produces items for which the annual fixed cost of production totals $25,000. If during one year the manufacturers variable costs per item decreases by $1 and the fixed costs increase by 10 percent, what is the net change in the manufacturer's total profit if the manufacturer continues to sell 5000 units annually at the same price?

A. $7,500 increase
B. $5,000 increase
C. $2,500 increase
D. No change
E. $2,500 decrease


Selling price is the same. So any change in profit, if at all, depends on the change in Cost price.
Lets say manufacturer's earlier variable cost per item is Rs 'x'. And his fixed cost = 25000. So his net cost earlier = 5000*x + 25000

Later, variable cost has decreased by 1, so new variable cost per item = Rs 'x-1'. And fixed cost has increased by 10%. So new fixed cost = 110% of 25000 = 27500
So his net cost now = 5000*(x-1) + 27500 = 5000*x + 22500

As we can see, cost has decreased by Rs 2500, so the profit will increase by Rs 2500.

Hence C answer
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Re: A manufacturer produces items for which the annual fixed cost of produ  [#permalink]

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New post 08 Jan 2018, 12:52
1
a be the variable cost
Net Cost earlier - 5000a + 25000

Variables cost later = a + 1
Fixed cost increased by 10% = 27500

Net cost later = 5000(a-1) +27500

Overall decrease by 2500
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Re: A manufacturer produces items for which the annual fixed cost of produ   [#permalink] 08 Jan 2018, 12:52
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