Question

6) For the past few years your company has sold 50,000 units of goods each year at a selling price of $26/unit. Fixed production costs were $300,000 and variable costs were $9 per unit. The Marketing Department expects 58,000 units for next year due to a new advertising campaign. Assume they are correct about the sales expectation and the costs remain the same. (a) What will be your company’s average total cost per unit next year? (b) What will be the marginal contribution rate? (c) What will be the profit margin next year? (d) What is the breakeven volume?

Answer 1

Answer:

Explanation:

Expected sales(S) -58000 units

Variable cost ( VC) = $9/unit

Fixed cost ( FC) =$ 300000

Sales price =$26/unit

a) Average total cost next year

ATC=(TFC+TVC)/number of units sold = TC/number of units sold

TFC-Total fixed cost; TVC - Total variable cost; TC-Total cost

TVC= 9×58000= 522000

TC=300000+522000=822000$

ATC= 822000/58000= 14.17$

 

b) Marginal contribution rate = contribution per unit of quantity sold

Contribution = SP-VC = = 26 - 9= $ 17

SP - Selling price; VC -Variable cost

​​​​marginal contribution is $17

C) Profit margin = Total sales - total cost

Total sales =  58000*26; Total cost = 58,000*14.17

PM= 1508000-821860 = $ 686140

 

d) Break even volume =( Fixed cost/profit volume ratio)

P/ v ratio =( Contribution /sales ) = 17/26

Break even volume = 300000/( 17/26)  = 458824$