5 An organisation produces products A and B. The following data is available: Se
ID: 2499314 • Letter: 5
Question
5
An organisation produces products A and B. The following data is available:
Selling price per unit for Product A is $20 and for Product B is $25.
Variable costs per unit for Product A is $11 and for Product B is $18.
Sixty percent of sales in units are expected to be Product A. Fixed costs are expected to be $82,000.
How many units of Product A does the organisation need to sell to break-even?
Answer:
Number
6
Dotty's Designs makes women's clothing. It costs $28,000 to produce 5,000 pairs of polka-dot polyester pants. They have been unable to sell the pants at their usual price of $50. The companu is evaluating two alternatives. They could sell the pants "as is" for a total of $15,000 or they could motify the parts by making them into shorts and sell them for a total of $20,000.
At what cost to modify each pair of pants, would Dotty's Designs be indifferent between the two alternatives?
Answer:
Unit
Number
Explanation / Answer
5.
Contribution margin for Product A = $20 - $11 = $9 per unit
Total fixed costs = $82,000
Proportion on sales of Product A = 60%
Fixed costs to be allocated to Product A = $82,000 * 0.60 = $49,200
Breakeven units = Fixed costs / Contribution margin per unit
Breakeven units of Product A = $49,200 / $9 = 5466.67 i.e. 5467 units
6.
Loss on sale of pants “as is” = $15,000 - $28,000 = -$13,000
Let the total cost to modify the pants = P
Total cost of making the shorts = $28,000 + P
Loss on sale of shorts = $20,000 – ($28,000 + P) = -($8,000 + P)
To be indifferent between the two alternatives, the outcome from both alternatives need to be equal.
Hence, -$13,000 = -($8,000 + P)
P = $13,000 - $8,000 = $5,000
Total cost to modify the pants = $5,000
Cost to modify each pair of pants = $5,000 / 5,000 = $1 per pair of pants
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