Question

show/explain work and do each part

ABC, Inc. manufactures three products: A, B, and C. Relevant data: Unit Unit Var Cost Sales price Sales in units 100 150 200 50 90 90 7,000 2.000 1.000 Fixed costs are $500,000. Required: a) What is the amount of profit at this sales volume? b) What is the breakeven point in sales dollars and units per product) at this sales mix? c) What sales volume in dollars must be achieved to earn a profit of $200,000? How many units of Product will be sold at this volume? (Assume constant sales mix) d) Marketing department believes that a $10,000 promotional campaign for either B or C could result in a 20% one-time increase in sales for that product. Which product, if any, should be chosen? Explain. e) Engineering department believes that acquiring new equipment for the Product A production line would reduct Variable cost to $35/unit. This would allow the price to be cut to $90, resulting in sales of 8,000 units per year. Fixed costs would increase by $50,000/year Sales of B and C would remain the same. dahil

Answer 1

Requirement (a) А TOTAL Sales in Units Sales Price per unit Variable Cost per unit Contribution margin per unit Total Contribution margin Fixed Cost Profit 2,000 150 $ 90 $ COŚ 1,000 200 90 7,000 100 $ 50 $ 50$ 3,50,000 $ $ $ $ 110 1,20,000 $ 1,10,000 $ $ $ 5,80,000 5,00,000 80,000

Requirement (b)

Let total sales in units be X at break even point. Sales Ratio is 7:2:1 for the products A, B and C respectively. At break even, total contribution will be equal to the fixed cost. Therefore the equation will be

(0.7X * $50) + (0.2X * $60) + (0.1X * $110) = $500,000

35X + 12X + 11X = $500,000

58X = $500,000

X = $500,000 / 58

X = 8,620.69 units

Sales in Units product

A = 0.7 * 8,620.69 i.e. 6,034.48 i.e. 6,034 units

B = 0.2 * 8,620.69 i.e.1,724.14 i.e. 1,724 units

C = 0.1 * 8,620.69 i.e. 862.07 i.e. 862 units

Sales in $

A = 6,034 units @ $100 i.e. $603,400

B = 1,724 units @ $150 i.e. $258,600

C = 862 units @ $200 i.e. $172,400

Requirement (c)

Let sales in units be Y

(0.7Y * $50) + (0.2 * $60) + (0.1Y * $110) = $500,000 + $200,000

35Y + 12Y + 11Y = $700,000

58Y = $700,000

Y = 12,068.96 units i.e. 12,069 units

Sales volume of A = (0.7 * 12,069 units) @ $100 i.e. $844,830

Sales volume of B = (0.2 * 12,069 units) @ $150 i.e. $362,070

Sales volume of C = (0.1 * 12,069 units) @ $200 i.e. $241,380

Sale in units of C = $241,380 / $200 i.e. 1,206.9 units

Requirement (d)

Product B should be chosen.

Explanation: Additional promotional expenses will result in increased sales of 20%. Therefore the contribution will also increase by 20%. Hence, product with higher total contribution margin should be chosen.

Requirement (e)

Current total contribution margin from A = $350,000

Contribution margin in

Contribution per unit = $90 - $35 i.e. $55

Total contribution margin = 8,000 units @ $55 i.e. $440,000

Incremental Benefit analysis

Increase in Contribution margin	$90,000
Less: Incremental fixed cost	$50,000
Benefit from New Equipment	$40,000

Therefore, new equipment will result in increase of profit by $40,000

Notes:

1. Be careful while reading numbers in image (with commas)
2. The units have been rounded off in requirement (b) and (c) because units cannot be partial. If your question does not permit the same, please change the decimal places for your calculations and change the answer accordingly.