Target Systems, Inc., makes heat-seeking missiles. It has recently been offered
ID: 2388996 • Letter: T
Question
Target Systems, Inc., makes heat-seeking missiles. It has recently been offered a government contract from which it may realize a profit. The contract purchase price is $130,000 per missile, but the number of units to be purchased has not yet been decided. The company’s fixed costs are budgeted at $3,973,500, and variable costs are $68,500 per unit.1. Compute the number of units the company should agree to make at the stated contract price to earn a profit of $1,500,000.
2. Using a lighter material, the variable unit cost can be reduced by $1,730, but total fixed overhead will increase by $27,500. How many units must be produced to make $1,500,000 in profit?
3. Given the figures in 2, how many additional units must be produced to increase profit by $1,264,600?
Explanation / Answer
(1) CONTRIBUTION=selling price-variable cost $130,000- $68,500 =$61500 contribution=$61500 per unit calculation of number of units to be sold=fixed cost+desired profit/contribution per unit 3,973,500+1,500,000/61500=89 units (2)variable cost=68500-1730=$66770 per unit contribution=130000-66770=$63230 per unit fixed cost=3,973,500+27500=$4001000 calculation of number of units to be sold=fixed cost+desired profit/contribution per unit 4001000+1500000/63230=87 units approx (3)desired profit=1500000+1264600=$2764600 calculation of number of units to be sold=fixed cost+desired profit/contribution per unit 4001000+2764600/63230=107 units approx (107-87) 20 units additional must be produced to increase profit by $1264600
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