Question

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

d) 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.

Answer 1

Per unit VC = cost of sales + marketing expenses + administrative expenses

                    = $6 + $0.80 + $1.20

                    = $8.00

Per unit CM (contribution margin) = per unit selling price – per unit VC

                                                        = $10 – $8

                                                        = $2

Break even points (BEP) in units = Total fixed costs / CM per unit

                                                     = (Marketing expenses + administration expense) / $2

                                                     = ($164,000 + $176,000) / $2

                                                     = $340,000 / $2

                                                     = 170,000 units

BEP in dollar = 170,000 units * $10

                       = $1,700,000

Computation of current profit:

Gross margin = sales – cost of sale

                       = (200,000 units * $10) – (200,000 units * $6)

                       = $2,000,000 – $1,200,000

                       = $800,000

Net margin = gross margin – [Marketing expenses + administration expense]

                   = $800,000 – [{($164,000 + (200,000* $0.8)} + {$176,000+ (200,000* $1.2)}]

                   = $800,000 – [$324,000 + $416,000]

                   = $800,000 – $740,000

                   = $60,000

Computation of the number of units of Product P to be produced to attain the double profit target when there are several changes in cost is shown as follows:

Per unit CM = per unit SP – per unit VC

                     = ($10 + $0.50) – (cost of sales + marketing expenses + administrative expenses)

                     = $10.5 – [($6.00 + $1.30) + ($0.8 + $1.20 – $0.40)]

                     = $10.5 – [$7.30 + $1.60]

                     = $10.5 – $8.90

                     = $1.60

Desired sales (in units) = (total FC + desired profit) / per unit CM

                                      = {($164,000 + $176,000 – $60,000) + (60,000 * 2)} / $1.60

                                      = $400,000 / $1.60

                                      = 250,000 units