Question

Solomon company is considering adding a new product. the cost accountant has provided the followng data:

Expected variable cost of manufacturing	$	43	per unit
Expected annual fixed manufacturing costs	$	60,000
The administrative vice president has provided the following estimates: Expected sales commission $ 5 per unit Expected annual fixed administrative costs $ 52,000 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 $64, how many units must Solomon sell to break even? Solomon estimates that sales will probably be 14,000 units. What sales price per unit will allow the company to break even? Solomon has decided to advertise the product heavily and has set the sales price at $68. If sales are 8,000 units, how much can the company spend on advertising and still break even?

Answer 1

Total variable costs per unit = Expected variable cost of manufacturing per unit + Expected sales comission per unit

= $43 + $5

= $48

Total fixed costs = Expected annual fixed manufacturing costs + Expected annual fixed administrative costs

= $60,000 + $52,000

= $112,000

At the breakeven point, operating income will be Zero.

Sales - Variable costs - Fixed costs = Operating income.

(Number of units * $64 per unit) - (Number of units * $48 per unit) - $112,000 = $0

Number of units * $16 per unit = $112,000

Number of units = $112,000 / $16

Number of units to be sold to breakeven = 7,000 units

Sales - Variable costs - Fixed costs = Operating income.

(14,000 units * Selling price per unit) - (14,000 units * $48) - $112,000 = $0

14,000 units * Selling price per unit = $784,000

Selling price per unit = $784,000 / 14,000

Selling price per unit = $56

Sales - Variable costs - Fixed costs = Operating income.

(8,000 units * $68 per unit) - (8,000 units * $48) - Fixed costs = $0

Fixed costs = $160,000

Spending on advertising = $160,000 - $112,000 = $48,000