Question

Yoshida Company is a semiconductor company based in Dapto. In the first year of its operations in 2019, it produced a new router system for its corporate clients. The average wholesale selling price of the system is $600 each. Yoshida’s actual 2019 costs are:

Variable cost per unit

Direct materials $65

Direct manufacturing labour $45

Manufacturing overhead $140

Total $250

Fixed costs

Manufacturing costs $2,400,000

Administration and marketing $2,000,000

Total $4,400,000

During 2019, Electron Company produced 24,000 units and 20,000 of which were sold by the end of year resulting in an ending inventory of 4,000 units at the end of the year.

Required: (a) What is the current breakeven point of the company in units?

(b) How many units the company needs to sell next year to make a profit of $3,000,000?

(c) Compute the number of units required to make a profit of $3,500,000 in the next year if the company adopted the following proposal to adjust both unit selling price and costs. The proposed new selling price is $500 and the variable cost per unit is expected to be reduced by $50 by installing more efficient equipment costing $600,000. (Round to the nearest unit).

(d) Prepare income statement using variable costing method and absorption costing method and explain the difference between the income reported by variable and absorption costing.

(e) If administrative and marketing expenses was a mixed cost instead of a fixed cost, establish a high–low cost function assuming that administrative and marketing expenses were $2,000,000 when20,000 units are sold (highest activity level), and $1,800,000 when 15,000 units are sold (lowest activity level).

(f) Assess the operating risk of the Electron company using the margin of safety and operating leverage.

Answer 1

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