Question

ABC, Inc. manufactures three products: A, B, and C. Relevant data:

	Unit	Unit
	Sales price	Var Cost	Sales in units
A	100	50	7,000
B	150	90	2,000
C	200	90	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 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

1)

	Units	Sales price	Total Sales	Variable cost	Total VC
A	7000	100	700,000	50	350,000
B	2000	150	300,000	90	180,000
C	1000	200	200,000	90	90,000
			1,200,000		620,000

Sales	1,200,000
Minus: VC	620,000
CM	580,000
Less: FC	500,000
Profit	80,000

CM = Sales - VC = 1,200,000 - 620,000 = 580,000

Profit = CM - FC = 580,000 - 5,00,000 = 80,000

2) Weighted average contribution per unit = CM/No of units = 580,000 / 10,000 = 58

Breakeven point in units = FC/Weighted average contribution per unit = 500,000 / 58 = 8620.59

No. of units of each product:

A = 8621 * 7/10 = 6035

B = 8621 * 2/10 = 1724

C = 8621 * 1/10 = 862

Breakeven point in $'s

A = 6035 * 100 =603,500

B = 1724 * 150 = 258,600

C = 862 * 200 = 172,400

Total = 603,500 + 258,600 + 172,400 = 1,034,500

3)

FC	500,000
Add: Desired Profit	200,000
	700,000
PV ratio	48.33%
Sales needed to earn 20,000 profit	1448280
Total sales	1448280
Weighted average selling per unit	120
Units needed to earn 20,000 profit	1207

Weighted average selling per unit = Total sales / No of units = 1200,000 / 10,000 = 120

PV ratio = 580,000 = 1200,000 =48.33%

4)

	Units	20% increase	Additional contribution
A	7000	1400	70,000
B	2000	2400	24,000
C	1000	1200	22,000

5)

VC	15
SP (100- 90)	-10
CM	5
Increase in sales	1,000
CM * Increase in sales	5,000
Additional FC	50,000
Profit/loss	-45,000