Question

As a newly hired management accountant, you have been asked to prepare a profit plan for the company for which you work. As part of this task, you’ve been asked to do some what-if analyses. Following is the budgeted information regarding the coming year:

Selling price per unit	$	100.00
Variable cost per unit		70.00
Fixed costs (per year)		1,200,000

Required:

1. What is the breakeven volume, in units and dollars, for the coming year?

2. Assume that the goal of the company is to earn a pretax (operating) profit of $300,000 for the coming year. How many units would the company have to sell to achieve this goal?

3. Assume that of the $70 variable cost per unit the labor-cost component is $25. Current negotiations with the employees of the company indicate some uncertainty regarding the labor cost component of the variable cost figure presented above. What is the effect on the breakeven point in units if selling price and fixed costs are as planned, but the labor cost for the coming year is 4% higher than anticipated? What if labor costs are 6% higher than anticipated? What if labor costs turn out to be 8% higher than anticipated?

4. Assume now that management is convinced that labor costs will be 5% higher than originally planned when the budget for the year was put together. What selling price per unit must the company charge to maintain the budgeted ratio of contribution margin to sales? (Hint: Use the Goal Seek function in Excel to answer this question.)

As a newly hired management accountant, you have been asked to prepare a profit plan for the company for which you work. As part of this task, you’ve been asked to do some what-if analyses. Following is the budgeted information regarding the coming year:

Selling price per unit	$	100.00
Variable cost per unit		70.00
Fixed costs (per year)		1,200,000

Required:

1. What is the breakeven volume, in units and dollars, for the coming year?

2. Assume that the goal of the company is to earn a pretax (operating) profit of $300,000 for the coming year. How many units would the company have to sell to achieve this goal?

3. Assume that of the $70 variable cost per unit the labor-cost component is $25. Current negotiations with the employees of the company indicate some uncertainty regarding the labor cost component of the variable cost figure presented above. What is the effect on the breakeven point in units if selling price and fixed costs are as planned, but the labor cost for the coming year is 4% higher than anticipated? What if labor costs are 6% higher than anticipated? What if labor costs turn out to be 8% higher than anticipated?

4. Assume now that management is convinced that labor costs will be 5% higher than originally planned when the budget for the year was put together. What selling price per unit must the company charge to maintain the budgeted ratio of contribution margin to sales? (Hint: Use the Goal Seek function in Excel to answer this question.)

Answer 1

1.Break even sales = Fixed expenses /Contribution margin

Contribution margin = Sale price -Variable cost /Sale price

=100-70/100 = 0.30 that is 30%

Break even sales ($) = 1,200,000/30%

= $ 4,000,000

Breakeven sales in units = Breakeven sales in $/ Sale price /unit

= 4,000,000/100/unit

= 40,000Unuits

2.Company wants to earn ore tax profit of $300,000, what will be the sales ?

Particulars		Amount
Sales	?	5,000,000
Less :Variable cost(100-30%=70%)	70%	3,500,000
Contribution margin	30%	1,500,000
Less::Fixed expenses		1,200,000
Profit before tax		300,000

Contribution margin = pretax profit +Fixed expenses

= 300,000+1,200,000

= 1,500,000

If contribution is 1,500,000(30%)

Then sales = 1,500,000/30%

= 5,000,000

Variable expense =70% of sales .

3.Varibale cost - labour expense $25/unit , other variable expenses $45/unit

a.Revised variable cost is 4% higher that is 25+4%=$26/unit

Breakeven sales (inunits) = Fixed costs /Contribution/unit

= 1,200,000/100-(26+45)

= 16,901 units

b.revised variable cost -25+6%+45 = 71.5

Breakeven sales (in units )=1,200,000/100-71.5 = 42,105 units

c. Revised variable cost = 25+8%+45 = 72

Breakeven sales (inunits) = 1,200,000/100-72

= 42,857units .

4.Labour varibale cost is 5% higher that is 25+5%=26.25/unit

Contribution margin = 30%

Sale price (71.25/70%)	100%	101.79
-varibale cost (26.25+45)	70%	71.25
Contribution margin	30%	30.54