Question

A small business manufactures and sells 63 product units during the year to end December 2004. The revenue arising from the sales is R 708 750 and the total manufacturing cost of the units is R 350 050, of which R 120 020 is due to fixed production costs.

Considering this and the supplementary spreadsheet, answer the following questions:

a) If the product price remains constant over the year, how many product units must be sold to recover the fixed production overhead costs (break even)?

b) If 100 units had been manufactured during the year, the total cost per product decreases to R4 851. Why?

Given Given Revenue Total Costs Fixed Costs Variable Costs Given = Total Costs - Variable Costs Gross Profit = Revenue - Total Costs Selling Price per Product (SP/prod) Variable Cost per product (VC/prod) Total Cost per Product (TC/prod) = Revenue / #units sold = Variable Costs / #units sold = Total Costs / #units sold Gross profit per product (GP/prod) = SP/prod - TC/prod Break-even Qty = Fixed Costs / GP/prod *rounded up *Assume even sales through the year Sales Rate/month Break-even occurs [months) [days) = Sales Rate/month / 12 = Break-even Qty / Sales Rate/month = Break-even occurs [months] * 30 *Assume 30 days in a month

Answer 1

ANSWER(a)

BREAK EVEN (UNIT)=16 UNITS

WORKING

SALES PER UNIT =708750/63=11250

VARIABLE COST=TOTAL COST-FIXED COST

=350050-120020=230030

VARIABLE COST PER UNIT=230030/63=3651.27

CONTRIBUTION PER UNIT=11250-3651.27=7598.73

BEP(UNIT)=FIXED COST/CONTRIBUTION PER UNIT

=120020/7598.73=15.79 WHICH WILL 16 IF WE ROUND OFF

ANSWER(b)

The Cost decrease to 4851 because Fixed Cost remained same when it was selling 63 units then Fixed cost per unit was 1905.08 and when they sold 100 units cost become 1200.20 this differance of 704.88 bring the cost to 4851