Angie's expects annual sales of 2,400 units, ± 3 percent, of a new product at a price of $59 a unit, ± 2 percent. The expected variable cost per unit is $27.20, ± 2 percent, annual fixed costs are $32,500, and depreciation is $4,400 per year. What is the total annual expense per unit under the pessimistic scenario? Ignore taxes.

a. $41.70

b. $43.59

c. $42.51

d. $40.02

e. $44.55

Option (b) is correct.

Explanation:

Variable cost = $27.20 (1 + 0.02)

= $27.20 * 1.02

= $27.74

Cash fixed cost = annual fixed costs : [annual sales (1 - 0.03) ]

= $32,500 : [2,400 (1 - 0.03) ]

= 13.96

Depreciation = Depreciation : [annual sales (1 - 0.03) ]

= $4,400 : [2,400 (1 - 0.03) ]

= 1.89

Total annual expense per unit:

= Variable cost + Cash fixed cost + Depreciation

= $27.74 + 13.96 + 1.89

= $43.59