Question

Green Co. produces only Product Z. As part of the annual budgeting, Green is considering whether to produce a new product. Green's CFO obtained information from various departments within the company. The plant manager expected the following costs would be incurred in producing the new product: Direct materials $1 per unit Direct labor $100 per hour Fixed cost $55,000 The marketing manager decided to spend $2 per unit for the first 5,000 items sold with no additional costs after that. The marketing manager confirmed that the current market price for the new product was $4,000 per 1,000 units. The plant manager told the CFO that the employees would be able to produce 500 units per hour. Approximately how many units would Green have to sell to break even?

Answer 1

Answer:

Total units= 23214

Explanation:

Giving the following information:

Direct materials $1 per unit

Direct labor $100 per hour (100/500 units= $0.2)

The marketing manager decided to spend $2 per unit.

Fixed cost $55,000

Price= $4,000/1,000 units= $4.

First, we will determine the effect of the first 5000 (with the mkt expense) on the fixed costs:

5000*[4-(1+0.2+2)]= 4000 - 55000= 51000

Break-even point= fixed costs/ contribution margin

Break-even point= 51000/ [4-(1+0.2)]= 18214 units

Total units= 23214