Exercise 1 A company manufactures a single product which has the following cost structure based on a production budget of 10,000 units. Materials – 4 kg at $3/kg$12 Direct labour – 5 hours at $7/hour$35 Variable production overheads are recovered at the rate of $8 per direct labour hour. Other costs incurred by the company are: $ Factory fixed overheads120,000 Selling and distribution overheads160,000 Fixed administration overheads80,000 The selling and distribution overheads include a variable element due to a distribution cost of $2 per unit. The fixed selling price of the unit is $129. Required:(a) Calculate how many units have to be sold for the company to breakeven.(b) Calculate the sales revenue which would give a net profit of $40,000.(c) If the company could buy in the units instead of manufacturing them, calculate how much it would be prepared to pay if both:(i) estimated sales for next year are 9,500 units at $129 each; and(ii) $197,500 of fixed selling, distribution and administrative overheads would still be incurred even if there is no production (all other fixed overheads would be saved).
Exercise 1
A company manufactures a single product which has the following cost structure based on a production budget of 10,000 units.
Materials – 4 kg at $3/kg
$12
Direct labour – 5 hours at $7/hour
$35
Variable production overheads are recovered at the rate of $8 per direct labour hour.
Other costs incurred by the company are:
$
Factory fixed overheads
120,000
Selling and distribution overheads
160,000
Fixed administration overheads
80,000
The selling and distribution overheads include a variable element due to a distribution cost of $2 per unit.
The fixed selling price of the unit is $129.
Required:
(a) Calculate how many units have to be sold for the company to breakeven.
(b) Calculate the sales revenue which would give a net profit of $40,000.
(c) If the company could buy in the units instead of manufacturing them, calculate how much it would be prepared to pay if both:
(i) estimated sales for next year are 9,500 units at $129 each; and
(ii) $197,500 of fixed selling, distribution and administrative overheads would still be incurred even if there is no production (all other fixed overheads would be saved).
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