Air Travel Inc. manufactures a wide variety of parts for commercial aircraft, in

Question

Air Travel Inc. manufactures a wide variety of parts for commercial aircraft, including airplain engines. The component is purchased by OEM (original equipment manufactureres) such as Boeing, for use in the larger and more powerful outboards. The units sell for $10,000 and sales volume averages 2,000 units per year. Recently, AirTravel's major competitor lowered the price of the equivalent part to $9,500. The market was very competitive, and Air Travel realized it had to meet the new price or lose significant market share. The controller assembled the following data for the most recent year.

Cost and Usage for Production of 2,000 Units:

Calculate the target cost for maintaining current market share and profitability.

Standard Cost Actual Quantity Actual Cost Materials $5,000,000 $7,000,000 Direct Labor 2,000,000 2,500,000 Indirect Labor 3,800,000 3,500,000 Inspection (hours) 1000 500,000 Materials handling
(number of purchase) 50,000 400,000 Machine setups 3,000 2,000,000 Returns and rework
(number of times) 200 100,000 Total $16,000,000

Explanation / Answer

Air Travel Inc. All Amounts in $ In order to calculate the cost for maintaining the current market share and profitability, we need to work out the breakeven point Breakeven point is a volume where Sales = Costs Assuming the number of units sold per year as X Let us work out the variable costs and fixed costs Fixed Costs Per Unit Materials (on actuals) 70,00,000 Labor Cost (on actuals) Direct Labor 25,00,000 Indirect Labor 35,00,000 Variable Costs Inspection 5,00,000 250 Materials Handling 4,00,000 200 Machine Setups 20,00,000 1000 Returns and rework 1,00,000 50 Total 1500 Thus, 9,500 X - 1,500 X = $ 7,000,000 + $ 2,500,000 + $ 3,500,000 = $ 13,000,000 Hence ,8,000 X = $ 13,000,000 or X = $ 13,000,000 / 8,000 = 1625 units At the breakeven level of 1,625 units, the total costs incurred will be Variable 2437500 Fixed 13000000 Total 15437500

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.