XYZ Manufacturing Company has fixed costs $240,000, it sells its only product at $50 per unit. For every $1 generated by the sale of their product, they have $0.20 that contributes to fixed costs and profit.

Required:

1. Calculate the variable cost per unit.

2. Assume that the company plans to sell 20,000 units this year. In your opinion, would the    

    Company be better off with this plan? Support your answer with necessary calculations

3. How many units the company needs to sell to start making profit? Why? Prove your answer.

(12.5 marks)

1) FOR EVERY DOLLAR GENERATED, THE 0.20$ GOES TO FIXED COST AND PROFIT WHICH MEANS THE CONTRIBUTION MARGIN IS 20% I.E.. (0.20/1*100)

THEREFORE VARIABLE COST WILL BE THE REMAINING PERCENTAGE I.E. 80%

IF COMPANY SELLS A PRODUCT AT $50 PER UNIT, THE VARIABLE COST PER UNIT IS $40 ($50*80%)

2) IF THE COMPANY SELLS 20000 UNITS THEN;

IF COMPANY SELLS 20000 UNITS THE COMPANY WOULD MAKE A LOSS OF 40000, SO IN MY OPINION THE COMPANY WOULD NOT BE IN LOSS WHICH WOULD NOT BE A GOOD OPTION FOR THE COMPANY.

3) IF THE COMPANY WANTS TO START TO MAKE PROFIT, THEN COMPANY WOULD HAVE TO SELL UNITS THAT COVER BOTH FIXED AND VARIABLE COSTS. FOR THAT WE HAVE TO CALCULATE BREAK EVEN SALE.

BREAK EVEN SALES = FIXED COSTS/ CONTRIBUTION MARGIN PERCENTAGE.

= 240000/20%

= $1200000 (1.2 MILLION)

SALES UNITS = SALES/ SALES PRICE

= 1200000/50

= 24000 UNITS

THEREFORE, THE COMPANY NEEDS TO SALE MORE THAN 24000 UNITS TO MAKE PROFIT.