Question

QUESTION 4

Green Grocer Ltd is a manufacturing entity in the city of Clutchmore. The company manufactures and sells a single product by the name of Product P.

In the financial year ended 30 June 2020, 200,000 units of Product P were sold for $10 each. The cost of sales was $6 per unit, and the total amount was considered as variable cost.

In addition, other expenses incurred by the company were as follows:

	Variable Cost component	Fixed Cost component
Marketing expenses	$0.80 per unit	$164,000
Administration expenses	$1.20 per unit	$176,000

Required:

A. Green Grocer Ltd wants to double the amount of profit made in the next financial year (i.e. year ending 30 June 2021). In order to achieve this:

• • The company will increase the selling price of Product P by $0.50 per unit.
• • The production processes will be changed. This will cause an increase in cost of sales of $1.30 per unit. Combined marketing and administration expenses, however, will decrease by $0.40 per unit for the variable cost component, and the fixed cost component will decrease by $60,000.

Based on the proposed pricing and cost structure, calculate the number of units of Product P needed to achieve the targeted profit in the next financial year.

(B) If Green Grocer Ltd abandons the proposed plan to change the pricing and cost structure of Product P as outlined in part (d), and the company still wants to double its profit in the next financial year (i.e. year ending 30 June 2021), then a second product by the name of Product Q may be introduced.

Product Q will sell for $12 per unit and has a variable cost of $8.50 per unit. In addition, total fixed cost will increase by $100,000 due to the company having to purchase additional equipment to manufacture Product Q.

The expected sales is 150,000 units of Product P and 100,000 units of Product Q.

Calculate:

1. 1. the weighted average contribution margin (WACM), and
2. 2. the number of units of Product P and Product Q required to earn the desired profit in the next financial year.

Answer 1