Problem 3-22A Analyzing sales price and fixed cost using the equation method LO

Question

Problem 3-22A Analyzing sales price and fixed cost using the equation method LO 3-1, 3-2, 3-5 Rundle Company is considering adding a new product. The cost accountant has provided the following data: Expected variable cost of manufacturing Expected annual fixed manufacturing costs 2 per unit $65,008 The administrative vice president has provided the following estimates: 7 per unit Expected sales commission Expected annual fixed administrative costs 31,000 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 a. If the sales price is set at $73, how many units must Rundle sell to break even? b. Rundle estimates that sales will probably be 8,000 units. What sales price per unit will allow the company to break even? c. Rundle has decided to advertise the product heavily and has set the sales price at $75. If sales are 14,000 units, how much can the company spend on advertising and still break even? a. Number of units b. Sales price c. Advertising cost per unit

Explanation / Answer

Variable Cost per unit = Variable Manufacturing Cost per unit + Variable Sales Commission per unit
Variable Cost per unit = $42 + $7
Variable Cost per unit = $49

Fixed Costs = Fixed Manufacturing Costs + Fixed Administrative Costs
Fixed Costs = $65,000 + $31,000
Fixed Costs = $96,000

Answer a.

At Breakeven profit is $0. Let breakeven number of units be x

Profit = (Selling Price - Variable Cost per unit) * Number of unit sold - Fixed Costs
$0 = ($73 - $49) * x - $96,000
$96,000 = $24 * x
x = 4,000 units

So, Rundle must sell 4,000 units to achieve breakeven.

Answer b.

At Breakeven profit is $0. Let selling price be $x

Profit = (Selling Price - Variable Cost per unit) * Number of unit sold - Fixed Costs
$0 = ($x - $49) * 8,000 - $96,000
$96,000 = ($x - $49) * 8,000
$12 = $x - $49
$x = $61

Sales price per unit is $61

Answer c.

At Breakeven profit is $0. Let selling price be $x

Profit = (Selling Price - Variable Cost per unit) * Number of unit sold - Fixed Costs - Advertising Cost
$0 = ($75 - $49) * 14,000 - $96,000 - Advertising Cost
Advertising Cost = $26 * 14,000 - $96,000
Advertising Cost = $364,000 - $96,000
Advertising Cost = $268,000

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