Write Company has a maximum capacity of 200,000 units per year. Variable manufac

Question

Write Company has a maximum capacity of 200,000 units per year. Variable manufacturing costs are $12 per unit. Fixed overhead is $600,000 per year. Variable selling and administrative costs are $5 per unit, and fixed selling and administrative costs are $300,000 per year. The current sales price is $23 per unit.
(a) sales units-150000 and (b) sales dollars-3450000

2.How many units must Write Company sell to earn a profit of $240,000 per year?

3.A strike at one of the company’s major suppliers has caused a shortage of materials, so the current year’s production and sales are limited to 160,000 units.

To partially offset the effect of the reduced sales on profit, management is planning to reduce fixed costs to $841,000. Variable cost per unit is the same as last year. The company has already sold 30,000 units at the regular selling price of $23 per unit.
a)What amount of fixed costs was covered by the total contribution margin of the first 30,000 units sold?
b)What contribution margin per unit will be needed on the remaining 130,000 units to cover the remaining fixed costs and to earn a profit of $210,000 this year?

Explanation / Answer

Total cost = Fixed cost plus variable cost FC = 600000+ 300000 VC = 17 per unit TC = 900000 + 17X Price = 23 per unit TR = 23X Profit is Total revenue - total cost So profit is 23X - 900000 - 17x = 6x - 900000 I dont see a question on the first part but i think this is what it would ask If they make 150000 units they will break even PROFIT = 6(150000)-900000 = 0 If there is 3450000 sales dollars then they sell (3450000/23) units: 150000 units 2. For a profit of 240000 we just plug this into the profit function and solve for X 240000 = 6X - 900000 so 6x = 1140000 so x = 190000 units 3. FC = 841000 VC = 17X since the price is 23 per unit then again the profit function is P = 23x-17x-841000 P = 6x-841000 The contribution margin can be thought of as the amount made per unit times the number of units in this case 6*30000. So the amount of fixed costs covered is 180000 B. The remaing fixed costs are 841000-180000 = 661000 in order to make a profit of 210000 this year we need to solve for what the contribution margin needs to be 210000 = 130000C -661000 so 871000 = 130000C C = 6.7 This means we need the contribution margin to be 6.7 instead of 6 as it was previously. This could be achieved by raising the price to 23.70 per unit.

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