only answer question (e) and (f)!!! The annualised fixed costs of making a toast
ID: 2526708 • Letter: O
Question
only answer question (e) and (f)!!!
The annualised fixed costs of making a toaster are $20,000 and the variable costs are $18 per unit. The toaster is sold for $30.
(a) Determine how many sales (per annum) are required to break even.
(b) In the past the company has been able to sell toasters at the rate of 2,000 per year when priced at $30 each. What profit was the company making?
(c) If the market suddenly becomes more competitive and the selling price is reduced to $29, determine graphically and algebraically how many of the toasters must now be sold before the reduced selling price increases profit (before tax)?
(d) However, market research has shown that there is a limited market overall and that only 3,000 of the toasters could be sold at a reduced price (from $30). To what level could the sales manager afford to lower the product price in order to sell 3,000 units?
(e) Because marketing has indicated that the price determined in (d) is unlikely to achieve the required 3,000 sales, the company is now considering strategies to further lower its costs. The production engineer has designed some improved tooling. To provide this tooling will raise the fixed costs to $24,000, but reduce the variable costs to $12. If the selling price is reduced to $28 (from $30), to what figure must sales be increased to justify the extra investment in this improved tooling?
(f) State all assumptions
only answer question (e) and (f)!!!
Explanation / Answer
(e) Contribution = Selling Price - Variable Cost = $28 - $12 = $ 16
Contribution Margin = (Contribution/ Sales ) *100 = 57.14%
Extra investment = $24,000 - $20,000 = $4,000
Extra Sales Required = $4,000 / 57.14% = $7000
(f) Cost Volume Profit is based on the following assumptions:
1. Fixed Costs remain same throughtout the period under consideration.
2. Variable Costs remain constant per unit of production.
3. Revenues and costs change only due to change in production/sales.
4. Costs can be separated in fixed and variable costs.
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