Enola, SA., manufactures a product that sells for £500. The variable costs per u
ID: 2575543 • Letter: E
Question
Enola, SA., manufactures a product that sells for £500. The variable costs per unit are: Direct materials £100; Direct labour £80 and Variable manufacturing overhead £50. During the year, the budgeted fixed manufacturing overhead is estimated to be £500,000, and budgeted fixed selling and administrative costs are expected to be £250,000. Variable selling costs are £20 per unit. The number of units that must be sold to earn £300,000 in profit before taxes is
Select one:
a. 4,000 units
b. 4,400 units
c. 4,300 units
d. 4,100 units
e. 4,200 units
Explanation / Answer
Total variable costs per unit
= Direct materials + Direct labor + Variable manufacturing overhead + Variable selling costs
= £100 + £80 + £50 + £20
= £250
Contribution margin per unit
= Selling price per unit – Variable costs per unit
= £500 - £250
= £250 per unit
Total fixed costs
= Fixed manufacturing overhead + Fixed selling and administrative overhead
= £500,000 + £250,000
= £750,000
Number of units required to be sold to earn a target profit
= (Fixed costs + Target profit) / Contribution margin per unit
= (£750,000 + £300,000) / £250
= 4200 units
So, option e is the correct option
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