Question

Could someone answer for me this question

Break-Even Analysis You are employed by Monarch Ltd which manufactures specialist hydraulic seals for the aircraft industry. The company has developed a new seal with the following budged data. Variable cost per unit Direct Materials Direct Labor Variable Overheads The draft budget for the following year is as follows: Production and Sales 60,000 units Fixed costs: Production 260,000 Administration 90,000 Selling, marketing and distribution 100,000 Contribution 840,000 Certain departmental managers within the company believe there is room for improvement on the budgeted figures and the following options have been suggested. (0) The sales manager has suggested that if the selling price was reduced by 10%, then an extra 30% unit could be sold. The purchasing manager has indicated that if materials requirements were increased in line, then a materials price reduction of 6.25% could be negotiated. With this additional output, fixed production costs would increase by £ 30,000, administration by £ 5,000 and selling, marketing and distribution by £ 10,000. Other costs would remain unchanged. The export manager has suggested that if the company increased overseas marketing £15,000 then exports would increase from 15,000 units to 17,000 units. With this suggestion, distribution costs would increase by £ 12,000 and all other costs would remain unchanged. The marketing manager has suggested that if an extra £40,000 were spent on advertising, then sales quantity would increase by 25%. The purchasing manager has indicated that in such circumstances, materials costs would reduce by £ 0.30 per unit. With this suggestion, fixed production costs would increase by £ 25,000, administration by £ 4,000 and other selling, marketing and distribution costs by £7,000. All other costs would remain unchanged. (iii)

Answer 1

A.

Initial Sales = 60000 units

Variable cost per unit = 16

Contribution = 840000

Let initial sale price be X, Then , 840000= 60000(X-16)

Therefore , Initial Selling Price = 30

Particulars	Option 1	Option 2	Option 3
Selling price A	27	30	30
Sales Qty B	78000	62000	75000
Direct Material	7.5	8	7.7
Labour & Overheads	8	8	8
Total Variable cost C	15.5	16	15.7
Fixed Production Cost	290000	260000	285000
Fixed Administration Cost	95000	90000	94000
Selling & Distribution Expense	110000	112000	107000
Total Fixed Cost D	495000	462000	486000
Contribution Per Unit (A-C) E	11.5	14	14.3
Total Contribution (E*B) F	897000	868000	1072500
Profit (F-D)	402000	406000	586500

For Option 4, Profit = 486000

Total Variable cost =(8-6.25%)+4+4 = 15.5

Total Fixed Cost =260000+90000+100000+50000+67000 = 567000

sales qty =78000

Contribution Required = FC + Profit = 567000+486000 = 1053000

let y be the selling price

78000(y-15.5)=1053000

y = 29

Therefore , selling price = 29 for option 4

B. Break Even point in units for option 4

= Fixed cost / contribution per unit

= 567000/(29-15.5) = 42000 units

Profit @ 60000 units = Contribution - fc

= 60000(29-15.50)- 567000

= 243000