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ABC Car Company wants to manufacture a new car known as

by BTGmoderatorDC » Tue Jul 24, 2018 5:30 pm

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ABC Car Company wants to manufacture a new car known as Model X, and it is trying to determine how many cars it needs to sell in order to make an annual profit of $30,500,000. The annual fixed costs for Model X total $50,200,000. In addition, each Model X car has an average cost of $5,000 per vehicle to manufacture. If the Company forecasts it will sell 20,000 Model X cars this year, at what price must the Company sell the car to achieve the desired annual profit?

A. $4,035
B. $4,036
C. $9,035
D. $16,140
E. $36,140
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by [email protected] » Tue Jul 24, 2018 9:06 pm
Hi All,

We're told that a Car Company wants to manufacture a new car known as Model X, and it is trying to determine how many cars it needs to sell in order to make an annual profit of $30,500,000, the annual fixed costs for Model X total $50,200,000 and each Model X car has an average cost of $5,000 per vehicle to manufacture. If the Company forecasts it will sell 20,000 Model X cars this year, we're asked at what price the Company must sell the car to achieve the desired annual profit. The answer choices are 'spread out' enough that you can use estimation to answer this question (although you will still have to be careful to keep track of the digits involved).

Our 'goal' is to have a PROFIT of approximately $30,000,000. We know that there are FIXED COSTS of approximately $50,000,000, so with just these two values, we would need REVENUE of approximately:
$30,000,000 + $50,000,000 = $80,000,000

However, we also have to consider the manufacturing COST per vehicle ($5,000 per vehicle for 20,000 vehicles). That would be:
($5,000)(20,000) = $100,000,000

Thus, we need TOTAL REVENUE to be:
$80,000,000 + $100,000,000 = $180,000,000

To hit that total, the price that we sell each car for would have to be approximately:
$180,000,000/20,000 =
$180,000/20 =
$9,000 approximately

Final Answer: C

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by Jeff@TargetTestPrep » Thu Jul 26, 2018 3:27 pm
BTGmoderatorDC wrote:ABC Car Company wants to manufacture a new car known as Model X, and it is trying to determine how many cars it needs to sell in order to make an annual profit of $30,500,000. The annual fixed costs for Model X total $50,200,000. In addition, each Model X car has an average cost of $5,000 per vehicle to manufacture. If the Company forecasts it will sell 20,000 Model X cars this year, at what price must the Company sell the car to achieve the desired annual profit?

A. $4,035
B. $4,036
C. $9,035
D. $16,140
E. $36,140
Let x = the selling price of a Model X car. Since revenue - cost = profit, we have:

20,000x - [20,000(5,000) + 50,200,000] = 30,500,000

20,000x - 150,200,000 = 30,500,000

20,000x = 180,700,000

x = 9,035

Answer: C

Jeffrey Miller
Head of GMAT Instruction
[email protected]

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