Question

The Khalid Company manufactures and sells Paso-the-Salsa, which is a bottled condiment used on a variety of foods. Each bottle is sold for $5. The company recently had the following costs to produce and sell 12,000 units of its product during August: Rent of $5,000 on a billboard to help advertise the product B. Rent on factory and equipment of $8,000 Total payroll for hourly paid, factory workers $24,000 Tomatoes, onions, spices and bottles $18,000 Total payroll for salaried, administrative staff $6,000 Answer the questions below using the data above (along with the appropriate variable cost and fixed cost classifications from the previous Participation Exercise). D 1. For future reference, what is the company's variable cost per unit (rounded to the nearest penny)? Enter answer...

Answer 1

1) Variable cost is the cost which changes with the change in number of units. From the given costs, the payroll cost for factory workers (direct labor cost) and cost of tomatoes, onions, spices and others (direct materials cost) are variable cost.

Total variable Cost = Payroll cost+Cost of tomatoes, onions, spices etc

= $24,000+$18,000 = $42,000

Variable cost per unit = $42,000/12,000 units = $3.50 per unit

Therefore the company's variable cost per unit is $3.50.

2) Fixed cost is the cost which remains fixed and not change with the change in number of units. From the given costs, rent to advertise the product, rent on factory and equipment and payroll for salaried, administrative staff are fixed costs.

Total fixed costs = $5,000+$8,000+$6,000 = $19,000

Therefore the company's total fixed costs are $19,000.

3) Calculation of Projected Net Income (Amounts in $)

Expected Sales (14,000 units*$5 per unit)	70,000
Variable cost (14,000 units*$3.50 per unit)	(49,000)
Contribution Margin	21,000
Fixed cost	(19,000)
Projected Net Income	2,000

Therefore the company's projected net income is $2,000.

4) Calculation of Projected Net Income if cost and price increased   (Amounts in $)

Expected Sales (13,000 units*$5.15 per unit)	66,950
Variable cost (13,000 units*$3.75 per unit)	(48,750)
Contribution Margin	18,200
Fixed cost	(19,000)
Projected Net Income/(Loss)	(800)

Therefore there will be a net loss of $800 if selling price and cost increased.

5) Contribution margin per unit = Selling price per unit - Variable cost per unit

= $5.00 per unit - $3.50 per unit = $1.50 per unit

Break even point in units = Total Fixed cost/Contribution Margin per unit

= $19,000/$1.50 per unit = 12,667 units

Therefore the company's break even point (in units) is 12,667 units.