GMAT OFFICIAL GUIDE PS

Solution:

The problem first asks us to calculate the gross profit. The profit equation is as follows:

Profit = Revenue – Cost

In this particular case, we are given VARIABLE REVENUE and VARIABLE COST. This means that Company X makes a certain amount of revenue PER TOOL and has a certain cost PER TOOL. We also are given a FIXED COST. This is a cost that is constant and will not change. Thus we need to take into account the quantity of tools being produced and sold as well as the fixed cost. We can now generate a more detailed profit equation:

Profit = (number of tools sold)(revenue per tool) – [fixed cost + (number of tools made)(cost per tool)]

We are given the following:

fixed cost = $10,000

cost per tool = $3

revenue per tool = $8

Number of tools produced and sold = 20,000

We can now plug all this into our profit equation:

Profit = (number of tools sold)(revenue per tool) – [fixed cost + (number of tools made)(cost per tool)]

P = 20,000 x 8 – [10,000 + (3 x 20,000)]

P = 160,000 – [10,000 + 60,000]

P = 160,000 – 70,000

P = 90,000

We have a profit of $90,000 for selling 20,000 tools, but remember that we need to determine the profit PER TOOL. To calculate this, we divide the total profit of $90,000 by the number of tools produced, which is 20,000. We have:

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

Answer: C

About The Author

Jeffrey Miller is the head GMAT instructor for Target Test Prep. Jeff has more than fourteen years of experience in the business of helping students with low GMAT scores hurdle the seemingly impossible and achieve the scores they need to get into the top 20 business school programs in the world, including HBS, Stanford, Wharton, and Columbia. Jeff has cultivated many successful business school graduates through his GMAT instruction, and will be a pivotal resource for many more to follow.