Question

B- AAA Manufacturing Company has the following information about its product: Selling price per unit 550 Fired costs $200,000 CM Ratio 30% Required: 1. Calculate the variable cost per unit. 2. Assume that the company plans to sell 15,000 units this year. In your opinion, did you think the Company would be better off with this plan? Support your answer with necessary calculations 3. How many units the company needs to sell to reach a break- even? Proof your answer. (10 marks)

Answer 1

Soltuion: 1
	CALCULATION OF VARIABLE COST PER UNIT
	Contribution Margin ratio =	30%
	Contribution Margin ratio = Sales - Variable Cost
	So, Variable Cost = 100% - 30% =	70%
	Variable Cost = Selling price X 70% = $ 50 X 70% =	$                           35	Per Unit
Soltuion: 2
	CALCULATION OF OPERATING INCOME IF 15,000 UNITS SOLD
	PARTICULARS	AMOUNT
	Sales (15,000 Units X $ 50)	$               7,50,000
	Less: Variable Cost (15,000 X $ 35)	$               5,25,000
	Gross Revenue	$               2,25,000
	Less: Fixed Cost	$               2,00,000
	Operating Income	$                   25,000
	Companies plan is better because by selling 15,000 units company is meeting
	his all variable and fixed expenses of $ 200,000
Soltuion: 3
	Contribution Margin Per unit = Sales per unit - Variable Cost per Unit
	Contribution Margin Per unit = $ 50 - $ 35
	Contribution Margin Per unit = $ 15
	CALCULATION OF THE BREAK EVEN POINT IN UNITS
	Break Even point =      Fixed Cost / Contribution Margin Per Unit
	Break Even point =
	Fixed Cost =	$               2,00,000
	Divide By	"/" By
	Contribution Margin Per Unit	$                           15
	Break Even point =	13,333.33
	Proof of Answer is as below:
	PARTICULARS	AMOUNT
	Sales (13,333.33 Units X $ 50)	$               6,66,667
	Less: Variable Cost (13,333.33 X 35)	$               4,66,667
	Gross Revenue	$               2,00,000
	Less: Fixed Cost	$               2,00,000
	Operating Income	$                            -