# Question

Hollis Company manufactures and markets a regulator used to maintain high levels of accuracy in timing clocks. The market for these regulators is limited and highly dependent upon the selling price.

Based on past relationships between the selling price and the resulting demand, as well as an informal survey of customers, management derived the following demand function, which is highly representative of the actual relationships.

D = 1,000 - 2P

Where

D = Annual demand in units

P = Price per unit

The estimated manufacturing and selling costs for the coming year are as follows:

Variable costs

Manufacturing ...... $75 per unit

Selling .......... $25 per unit

Fixed costs

Manufacturing ...... $24,000 per year

Selling .......... $6,000 per year

A. Write the function for total revenue.

B. Write the total cost function, substituting the demand function for Q.

C. Perform a search on the Internet to find a quadratic equation calculator or go to www.

wiley.com/college/eldenburg. Use the calculator to find the breakeven points.

D. Draw a graph with total revenue and total cost for Q between zero and 1,000 units. Mark the breakeven points.

E. Determine the selling price that Hollis Company should charge per regulator and the number of regulators the company should sell to maximize the company’s profits for the coming year.

F. Which CVP assumption does this situation violate? Explain.

G. For the past several years, assume the company sold regulators at the price you calculated in part (E) and that volume varied between 375 and 425 units per year. In this situation, discuss whether it would be appropriate to use CVP analysis to estimate the company’s profits.

Based on past relationships between the selling price and the resulting demand, as well as an informal survey of customers, management derived the following demand function, which is highly representative of the actual relationships.

D = 1,000 - 2P

Where

D = Annual demand in units

P = Price per unit

The estimated manufacturing and selling costs for the coming year are as follows:

Variable costs

Manufacturing ...... $75 per unit

Selling .......... $25 per unit

Fixed costs

Manufacturing ...... $24,000 per year

Selling .......... $6,000 per year

A. Write the function for total revenue.

B. Write the total cost function, substituting the demand function for Q.

C. Perform a search on the Internet to find a quadratic equation calculator or go to www.

wiley.com/college/eldenburg. Use the calculator to find the breakeven points.

D. Draw a graph with total revenue and total cost for Q between zero and 1,000 units. Mark the breakeven points.

E. Determine the selling price that Hollis Company should charge per regulator and the number of regulators the company should sell to maximize the company’s profits for the coming year.

F. Which CVP assumption does this situation violate? Explain.

G. For the past several years, assume the company sold regulators at the price you calculated in part (E) and that volume varied between 375 and 425 units per year. In this situation, discuss whether it would be appropriate to use CVP analysis to estimate the company’s profits.

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