Question

 

The National Company has just been formed. They have a patented process which will make them the sole suppliers of Product A.

 During the first year the capacity of their plant will be 9,000 units and this is the amount they will be able to sell.

Their costs are:

Direct Labor = £15 per unit

Raw material = £5 per unit

Other variable costs = £10 per unit

Fixed costs = £240,000

Required:

(a). If the company wishes to make a profit of £210,000 during the first year, what should be the selling price? What is the contribution margin at this price?

(b). If at the end of first year, they wish to increase their volume and an increase or £100,000 in the annual fixed costs will increase their capacity to 50,000 units, how many units will they have to sell to realise a profit of £760,000, if their selling price is £70 per unit and no other costs change, except that invest £500,000 in advertising with a view to achieve this end?

Answer 1

a$)$ Selling price

Direct labor$($ 9000$×$ 15 $)$ $=$ $ 135$,$ 000

Raw materials$($ 9000$×$ 5$)$ $=$ $ 45$,$ 000

Other variable $($ 9000$×$ 10$)$ $=$ $ 90$,$ 000

Total variable$($ per unit 30$)$ $=$ $ 270$,$ 000

Add fixed cost$=$ 240$,$ 000

Profit$=$ 210$,$ 000

Total sale value of 9000 units $@$ $ 80 per unit$=$ $ 720$,$ 000

b$)$ Sales in units

$($ fixed expenses$+$ Desired profits$)$ $/$ $($ sales$-$ variable cost$)$

Therefore$,$

Fixed expenses$=$ 240$,$ 000$($ given$)$ $+$ 100$,$ 000$($ extra$)$ $+$ 50$,$ 000$($ advertisement $)$

$=$ 840$,$ 000$+$ 760$,$ 000$($ desired profit$)$ $=$ $ 1$,$ 600$,$ 000

$=$ 1$,$ 600$,$ 000$/$ $($ 70$-$ 30$)$ $=$ 40$,$ 000 units