Question

Yilan Company is considering adding a new product. The cost accountant has provided the following data.

Expected variable cost of manufacturing$49 per unit  

Expected annual fixed manufacturing costs$68,000

The administrative vice president has provided the following estimates.

expected sales commission $3 per unit Expected annual fixedadministrative costs 52000 a)If the sales price is set at $67, how many units must Yilan sell to break even? b)Yilan estimates that sales will probably be 10,000 units. What sales price per unit will allow the company to break even? c)Yilan has decided to advertise the product heavily and has set the sales price at $72. If sales are 7,000 units, how much can the company spend on advertising and still break even?

Answer 1

A. Break even sale units in equation method = Fixed cost/ ( sale price per unit - variable costs per unit)
= 120000 / ( 67 - 49-3 )
= 5000
At a sale price of $67, 5000 units are tobe sold to break even.

b) given sales units = 10000 units
at the break even point ( price per unit - variable cost per unit) * number of units = fixed cost
here sale price per unit is to be found out
variable cost = 49 + 3 = 52
number of units = 10000
fixed cost = 120000
= (sale price - $ 52) * 10000 = 120000
= Sale price = (120000 / 10000) + $ 52
= sale price = 64
Therefore, if 10000 units are to be sold the price should atleast be $64, in order to break even.

C) the amount that can be spent on advertising and to still break even shall be equal to profit under the existing circumstances.
Profit = [ (sale price per unit - variable cost per unit) * number of units sold] * fixed cost
= [ ( $ 72 - $52 ) * 7000 ] - 120000
= $ 20000