Scott Woodbury-Stewart

GMAT OFFICIAL GUIDE PS – The total cost for Company X to produce a batch of tools is $10,000 plus…

The total cost for Company X to produce a batch of tools is $10,000 plus…

Solution:

We know the relationship between profit, revenue and cost is: profit = revenue – cost or P = R – C (the relationship is actually given here). We want to find the profit of producing and selling 20,000 tools. Since each tool is sold for $8, the revenue is:

R = 20,000($8) = $160,000

Since each tool costs $3 to make and there is an fixed cost of $10,000, the cost is:

C = 20,000($3) + $10,000 = $60,000 + $10,000 = $70,000

Therefore, the profit of producing and selling 20,000 tools is:

P = R – C

P = $160,000 – $70,000

P = $90,000

$90,000 is the total profit of 20,000 tools, so the profit per tool is:

$90,000/20,000 = $9/2 = $4.50

Answer: C

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