Question

Fixed Cost = $500,000

ABC, INC. manufactures three products: A, B, and C. Relevant data below: Unit Sales price Unit Var Cost Sales in units 100 150 200 50 90 7,000 2,000 1,000 90 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 C 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. Would this plan increase profits? Explain.

Answer 1

	A	B	C	Total
Sales revenue	700,000	300,000	200,000	1,200,000
Less: Variable costs	350,000	180,000	90,000	620,000
Contribution Margin	350,000	120,000	110,000	580,000
Less: Fixed costs				500,000
Profit				80,000
a.Profit at this level = $80,000
Overall CM per unit = CM/Units
58	per unit
CM Ratio = CM/Sales	48.333%
Break even point in Sales dollars = Fixed costs/CM Ratio	1,034,482.76
In Units = Fixed costs/CM per unit	8620.689655	units
c)Sales volume = (Desired Profit+Fixed costs)/CM Ratio
1,448,275.86
Volume of C	241,379.31
Units	1,206.90	units
d)C should be chosen as contribution margin is higher
e)
	A	B	C	Total
Sales revenue	720,000	300,000	200,000	1,220,000
Less: Variable costs	280,000	180,000	90,000	550,000
Contribution Margin	440,000	120,000	110,000	670,000
Less: Fixed costs				550,000
Profit				120,000
Yes, profits will increase by $40,000