A company manufactures a single product which has the following cost structure
based on a production budget
of 10,000 units.
Materials – 4 kg at $3/kg $12
Direct labour – 5 hours at $7/hour $35
Variable production overheads are recovered at the rate of $8 per direct labour
Other costs incurred by the company are:
Factory fixed overheads 120,000
Selling and distribution overheads 160,000
Fixed administration overheads 80,000
The selling and distribution overheads include a variable element due to a
distribution cost of $2 per unit. The fixed selling price of the unit is $129.
You are required to;
(a) Calculate how many units have to be sold for the company to breakeven.
(b) Calculate the sales revenue which would give a net profit of $40,000.
(c) If the company could buy in the units instead of manufacturing them,
calculate how much it would be prepared to pay if both:
(i) estimated sales for next year are 9,500 units at $129 each; and
(ii) $197,500 of fixed selling, distribution and administrative overheads
would still be incurred even if there is no production (all other fixed
overheads would be saved).