Question

A specialist graphics company is investing in a new machine which enables it to make high quality prints for its clients. Demand for these prints is forecast to be around 50,000 units in year 1 and 80,000 units in year 2. The maximum capacity of each machine the company will buy to process these prints is 60,000 units per year. They have a fixed cost of RM40,000 per year and a variable processing cost of RM0.50 per unit. The company believe they will be able to charge RM2 per unit for producing the prints.

1. Calculate the total cost for year 1.
2. What is the total profit for year 1?
3. Calculate the total cost for year 2.   
4. What is the total profit for year 2?

Answer 1

fixed cost = RM40,000 per year

variable cost per unit = RM0.50

selling price per unit = RM2 hence

contribution per unit = selling price per unit - variable cost per unit = 2 - 0.50 = RM1.50

a)  here demand = 50000 units but capacity is 60000 units hence total unit for sale in year 1= production for year 1 = 50000 units

total cost for year 1 = (variable processing cost per unit * production for year 1) + fixed cost

= (0.50 * 50000) + 40000

= RM 65000

b) the total profit for year 1 = (contribution per unit * total unit for sale in year 1) - fixed cost

= (1.50 * 50000) - 40000

= RM35000

c)  here demand = 80000 units but capacity is 60000 units hence total unit for sale in year 2= production for year 2 = 60000 units

total cost for year 2 = (variable processing cost per unit * production for year 1) + fixed cost

= (0.50 * 60000) + 40000

= RM 70000

d) the total profit for year 2 = (contribution per unit * total unit for sale in year 2) - fixed cost

= (1.50 * 60000) - 40000

= RM50000