Question

Vernon Company is considering adding a new product. The cost accountant has provided the following data:

Expected variable cost of manufacturing	$	42	per unit
Expected annual fixed manufacturing costs	$	70,000

The administrative vice president has provided the following estimates:

Expected sales commission	$	8	per unit
Expected annual fixed administrative costs	$	50,000

The manager has decided that any new product must at least break even in the first year.

Required

Use the equation method and consider each requirement separately.

If the sales price is set at $65, how many units must Vernon sell to break even?

Vernon estimates that sales will probably be 10,000 units. What sales price per unit will allow the company to break even?

Vernon has decided to advertise the product heavily and has set the sales price at $70. If sales are 12,000 units, how much can the company spend on advertising and still break even?

Answer 1

Total Variable Cost = Variable Manufacturing Cost + Sales Commission
Total Variable Cost = $42 per unit + $8 per unit
Total Variable Cost = $50 per unit

Total Fixed Cost = Fixed Manufacturing Costs + Fixed Administrative Costs
Total Fixed Cost = $70,000 + $50,000
Total Fixed Cost = $120,000

Answer 1.

Selling Price = $65 per unit

Let Breakeven Sale be X units

Profit = Sales - Variable Costs - Fixed Cost
Profit = Selling Price * Units Sold - Variable Cost per unit * Units Sold - Fixed Cost
0 = $65 * X - $50 * X - $120,000
$120,000 = $15 * X
X = 8,000

So, breakeven sale is 8,000 units

Answer 2.

Breakeven Sales = 10,000 units

Let Selling Price be $X per unit

Profit = Sales - Variable Costs - Fixed Cost
Profit = Selling Price * Units Sold - Variable Cost per unit * Units Sold - Fixed Cost
0 = $X * 10,000 - $50 * 10,000 - $120,000
$620,000 = $X * 10,000
$X = $62

So, selling price is $62 per unit to achieve the breakeven sale of 10,000 units

Answer 3.

Breakeven Sales = 12,000 units
Selling Price = $70 per unit

Let Advertising Expense be $X

Profit = Sales - Variable Costs - Fixed Cost - Advertising Expense
Profit = Selling Price * Units Sold - Variable Cost per unit * Units Sold - Fixed Cost - Advertising Expense
0 = $70 * 12,000 - $50 * 12,000 - $120,000 - $X
$X = $120,000

So, advertising expense is $120,000 to achieve the breakeven sale of 12,000 units