Question

Question 5.2 As part of the planning for Ciderman (introduced in topic 4), the following information has been estimated:

Units produced and sold 2500 units

Estimated revenue $3,500,000

Estimated mark-up on full cost 15%

Desired rate of return on investment 17%

Estimated variable cost per unit $550

1. Calculate the following items: a. Full cost of production per unit b. Selling price per unit c. Percentage mark-up on variable cost d. Total fixed costs

2. The Karmichaels' have consulted with their management accountant and the its is estimated that increasing the annual advertising spend for the first year by another $250,000 could result in an increase in the number of units by 12%. Make a recommendation regarding whether this additional investment should be done (show any calculations to support your recommendation).

Answer 1

Estimated revenue $3,500,000

Answer to Q 1 (a).

Estimated markup on full cost 15% which means Full cost + 15% of full cost = revenue

using the above equation,

assume full cost as X

then, we have X + 0.15X =3,500,000

1.15X = 3,500,000

X = 3,043,478.26

Full cost = $ 3,043,478.26

Full cost of production per unit = Full cost / no. of units produced

Full cost of production per unit = 3,043,478.26 / 2500

Full cost of production per unit = $ 1217.39 per unit (approx)

(b) Selling price per unit = Total revenue / no of units sold

= $ 3,500,000 / 2500

selling price per unit = $ 1400 per unit

(c) Estimated variable cost per unit (Given) = $ 550

Total Markup on full cost per unit = Selling price per unit - full cost per unit

Total markup per unit = 1400 - 1217.39

= $ 182.61 per unit

Percentage markup on variable cost = Total markup per unit / total variable cost per unit * 100

= 182.61 / 550 * 100

= 33.20 %

(d) Total fixed cost = full cost - Total variable cost

= (Full cost per unit - variable cost per unit) * total no. of units produced

= (1217.39 - 550) * 2500

= 667.39 * 2500

Total Fixed cost = $ 1,668,475

Answer to Q 2.

If Additional spend incurred for advertising , then

Revised Number of units will be = 2500 + 2500*12%

= 2500 + 300

= 2800 units

Revised Cost structure will be as follows :-

Total Fixed Cost (a) = $ 1,668 475

Total Variable cost ( 550 * 2800 units ) (b) = $ 1,540,000

Additional advertising cost (c) = $ 250,000

Total Full cost (a+b+c) = $ 3,458,475

Revised Sale revenue will be = Selling price per unit * revised no. of units

= 1400 * 2800

= $ 3,920,000

Revised total markup = Revised sales revenue - revised full cost

= $ 3,920,000 - $ 3,458,475

= $ 461,525   

Estimated markup on full cost (in %) = revised total markup / revised full cost * 100

= 461,525 / 3,458,475 * 100

= 13.34 % (approx)

Therefore, Company should not go for investing additional cost in advertising as it will lead to fall in its markup on full cost from 15% to 13.34%, if other factors remains same.