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?
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
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