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.
1.What is the breakeven point in (a) sales units and (b) sales dollars?
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

Variable Costs total to $12+5=$17/unit.
The fixed cost is $600,000+$300,000=$900,000

If we're selling them for $23 a unit, then $23-$17 is the profit we make off each one (just looking at variable, which is always the same for every unit). We make $6. But we need to cover $900,000 in fixed costs with this $6 we make net per unit.

Therefore, $6x=$900,000
That means that x=150,000 units.

1) Breakeven point is 150,000 sales units. In sales dollars, we make $23 in revenue (not in profit) times our units = $3,450,000 sales dollars.

2) To make $240,000 profit, not only do we cover our $900,000 fixed costs, but add to that our profit. now our equation is $6x=$1,140,000. There, x = 190,000 units we must sell

3) a)We make $6 margins on each unit sold, so $6 * 30,000 = $180,000 of fixed costs were covered

b) Now we know that 130,000 is our x (total units) but we don't know how much margin we will be making. So we'll call this

130,000 * m = ($210,000+$841,000-$180,000) <--what I've done is put in the new fixed costs plus the total profit minus what we had already covered.

M=$6.70

We need a contribution margin per unit of $6.70 per unit (which will mean selling each product at $23.70)

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