Question

Air Travel Inc. manufactures a wide variety of parts for commercial aircraft, including airplane engines. The component is purchased by OEM (Original Equipment Manufacturers) such as Boeing, for use in the larger and more powerful outboards. The units sell for $10,000, and sales volume averages 2,000 units per year. Recently, Air Travel’s major competitor lowered the price of the equivalent part of $9,500. The market was very competitive, and AirTravel realized it had to meet the new price or lose significant market share. The controller assembled the following data for the most recent year:

Cost and Usage for Production of 2,000 Units:

Air Travel Inc. manufactures a wide variety of parts for commercial aircraft, including airplane engines. The component is purchased by OEM (Original Equipment Manufacturers) such as Boeing, for use in the larger and more powerful outboards. The units sell for $10,000, and sales volume averages 2,000 units per year. Recently, Air Travel’s major competitor lowered the price of the equivalent part of $9,500. The market was very competitive, and AirTravel realized it had to meet the new price or lose significant market share. The controller assembled the following data for the most recent year:

Cost and Usage for Production of 2,000 Units:

                                                                            Standard Cost            Actual Quantity                 Actual Cost

Materials                                                        $5,000,000                                                                $ 7,000,000

Direct labor                                                        2,000,000                                                                 2,500,000

Indirect labor                                                 3,800,000                                                                 3,500,000

Inspection (hours)                                                                                      1,000                              500,000

Materials handling (number of purchases)                                        50,000                                400,000

Machine setups                                                                                           3,000                             2,000,000

Returns and rework (number of times)                                                  200                                   100,000

Total                                                                                                                                                 $16,000,000

Question:

Calcuate the target cost for maintaining current marekt share and profitability.

Answer 1

Solution:

Air Travel Inc.
All Amounts in $
In order to calculate the cost for maintaining the current market share and profitability, we need to work out the breakeven point
Breakeven point is a volume where Sales = Costs
Assuming the number of units sold per year as X
Let us work out the variable costs and fixed costs
Fixed Costs					Per Unit
Materials (on actuals)			70,00,000
Labor Cost (on actuals)
Direct Labor			25,00,000
Indirect Labor			35,00,000
Variable Costs
Inspection			5,00,000		250
Materials Handling			4,00,000		200
Machine Setups			20,00,000		1000
Returns and rework			1,00,000		50
		Total			1500
Thus, 9,500 X - 1,500 X = $ 7,000,000 + $ 2,500,000 + $ 3,500,000 = $ 13,000,000
Hence ,8,000 X = $ 13,000,000 or X = $ 13,000,000 / 8,000 =						1625	units
At the breakeven level of 1,625 units, the total costs incurred will be
Variable		$2,437,500
Fixed		$13,000,000
Total		$15,437,500