Question

Jaybird Company operates in a highly competitive market where the market price for its product is $50 per unit. Jaybird desires a $15 profit per unit. Jaybird expects to sell 5,000 units. Additional information is as follows: Variable product cost per unit $ 15 Variable administrative cost per unit 10 Total fixed overhead 45,000 Total fixed administrative 18,000 To achieve the target cost per unit, Jaybird must reduce total expenses by how much?

Answer 1

Answer:

Profit if 5,000 units were produced   $                    $

Total sales (5,000 x $50)                                     250,000

Less:

Total cost:

Total variable cost (5,000 x $25) 125,000

Total fixed cost                               63,000          188,000

 Net profit                                                               62,000

Desired profit = $15 x 5,000 units = $75,000

Difference in profit = Desired profit - Net profit

                               = $75,000 - $62,000

                               = $13,000

Reduction in total expenses = Difference in profit

Reduction in total expense = $13,000

New total expenses = $188,000 - $13,000 = $175,000

The company should reduce the total expenses by $13,000 in order to achieve the target cost per unit.

                   

                 

Explanation:

In this case, there is need to determine the net profit if 5,000 units were produced. Then, we will obtain difference in profit by deducting the net profit from the desired profit. The difference in profit represents reduction in cost. The new total expenses will be the original total cost less reduction in cost. The total variable cost is the aggregate of variable product cost and variable administrative cost while the total fixed cost is the sum of total fixed overhead and total fixed administrative overhead.