Question

Tom has recently started a toy business. If everything goes well, he hopes to make an operating income of 20,000. Tom makes and sells only one toy truck. He plans to sell each toy truck for $10 dollars. Tom has a variable cost of 5 dollars a toy and fixed costs of 25,000. He is new to his business, so he is looking at different ways to map his costs. Tom has reached out to you for consulting. As a consultant firm write tom a memo letting him know his breakeven point, quantity of toys needed to be sold for desired operating income and describe ABC costing. Let him know if he should invest in such a system with his current business needs. If not, should he consider using such a system in the future?

Answer 1

sales price per unit variable cost per unit contribution margin per unit $ 10.00 $5.00 $5.00 breakeven point = fixed costs / contribution margin per unit breakeven point = $25,000 / $5 breakeven point = 5,000 units toys needed to be sold for desired operating income of $20,000 units needs to be sold = (fixed costs + desired operating income) / contribution margin per unit units needs to be sold = ($25,000 + $20,000) / $5 units needs to be sold = $45,000 / $5 units needs to be sold = 9,000 units ABC costing - ABC costing stands for activity based costing. Under ABC costing, the overheads are allocated to different product lines based upon the product' line's usage of the overhead's cost driver for example, under ABC costing, the setup costs shall be allocated to different product lines based on number of setups required by each product lines and the rent costs shall be allocated based on the area used by the each product lines. he should invest in such a system if he believes he can sell 9,000 toy trucks in the market i.e. if there is demand in the market for 9,000 toy trucks. Else, he should consider using such a system in the future when be believes he can sell 9,000 toy trucks in the market.

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