Question

A company manufacturing toys has a fixed cost of $60,000. Variable cost is 6 per toy.

Selling price is $10 per toy. Company target profit is $100,000.

The company found that its variable cost is going to increase by $1.5 and plans to raise its selling price by $3 and reduced the fixed costs by $20,000.

1. How many more (less) toys must be sold at the new price to reach the target profit of $100,000?

2. What is the markup (profit margin %) on sales price at this new sales volume? What is the markup (profit margin %) on total cost?

Answer 1

i) Sales units required = Fixed cost + Desired profit / Contribution per unit

Contribution per unit = $10 - $6 =$4

Earlier Sales required = ($60000 + $100000) / $4 = 40000 units

As per the new proposal,

Selling price = $10 + $3 =$13

Variable cost = $6+$1.5 = $7.5

Fixed cost = $60000-$20000 =$40000

Contribution per unit = $13-$7.5 =$5.5

Sales required = ($40000 + $100000) / $5.5 = 25455 units

So, to target the profit of $100000 compnay is required to sell (40000-25455) = 14545 units less under new proposal.

ii) At this new sale of 25455 units

Profit = Sales - variable cost - fixed cost = contribution - fixed cost

= $5.5 x 25455units - $40000 = 100002.5

Markup on selling price = profit / sales x 100= (100002.5 / 13*25455 ) x 100

= 30.22% approx.

Total cost = Variable cost + Fixed cost = $7.5 x 25455 + $40000 = $230,912.5

Markup on total cost = profit / Total cost x 100 = 100002.5 / 230912.5 x 100

= 43.31%