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 airplane engines. The component is purchased by OEM (Original Equipment Manufacturers) 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, Air Travel’s major competitor lowered the price of the equivalent part of $9,500. The market was very competitive, and AirTravel 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:

Air Travel Inc. manufactures a wide variety of parts for commercial aircraft, including airplane engines. The component is purchased by OEM (Original Equipment Manufacturers) 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, Air Travel’s major competitor lowered the price of the equivalent part of $9,500. The market was very competitive, and AirTravel 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:

                                                                            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)                                                                                      1,000                              500,000

Materials handling (number of purchases)                                        50,000                                400,000

Machine setups                                                                                           3,000                             2,000,000

Returns and rework (number of times)                                                  200                                   100,000

Total                                                                                                                                                 $16,000,000

Question:

Calcuate the target cost for maintaining current marekt share and profitability.

Explanation / Answer

Solution:

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 $2,437,500 Fixed $13,000,000 Total $15,437,500

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