Question

Wallaby Company produces a single product. Sales for the current year are 25,000 units.
Relevant data:
Selling price/unit		130
Variable cost/unit		80
Fixed costs		1,300,000
a)	What is Wallaby's net income for the current year?
b)	Compute Wallaby's breakeven point in sales units.
c)	Marketing Director believes that unit sales would increase by 20% if the price were cut by 10%.
	Should Wallaby take this action? Explain.
d)	Production Manager is considering outsourcing the production of some parts. This would reduce fixed
	costs to $1,000,000, but increase variable cost/unit to $100.
	What would the breakeven point be if this action were taken?

Answer 1

Answer:

a.       Net income

	Amount($)
Selling price per unit	130
Variable cost per unit	80
Contribution per unit	50
Sales unit	25000 units
Total contribution	1250000
Fixed costs	1300000
Net loss	$50000

b.      Break even points = Fixed cost/ Contribution per unit

                                 = 1300000/50

                                 = 26000 units

c.       Sales increased by 20% and price cut by 10%

	Amount($)
Selling price per unit	117 (130*0.90)
Variable cost per unit	80
Contribution per unit	37
Sales unit	30000 (25000*120%)
Total contribution	1110000
Fixed costs	1300000
Net loss	$190000

Don’t take the action

d.      Outsourcing decision

Contribution per unit = 130 – 100

                                       = $30

Break even point = Fixed cost/Contribution per unit

                                 = 1000000/30

                                 = 33333 units

Don’t take the action