Question

es, fixes, and improvements, choose Check for Updates. Cost Concepts 01. Khaled has developed a new technology device that is so exciting he is considering quitting his job in order to produce and market it on a large-scale basis. Khaled will rent a small factory for 1,000dhs per month for production purposes. Utilities will cost 500dhs per month, Khaled has already taken an industrial design course at Dubai Men's College to help prepare for this venture. The course cost 800dhs. Khaled will rent production equipment at a monthly cost of 3,000dhs. He estimates the material cost per unit will be 20dhs, and the labor cost will be 12dhs per unit. He will hire workers and spend his time promoting the product. To do this he will quit his job which pays 25,000dhs per month. Advertising and promotion will cost 3,500dhs per month. Required: 1- Complete the chart below by placing an "X" under each heading that helps to identify the cost involved. There can be "X's" placed under more than one heading for a single cost, e.g., a cost might be a sunk cost, an overhead cost and a fixed cost; there would be an "X" placed under each of these headings opposite the cost 2- Calculate the total Fixed cost 3- Calculate the total variable cost per unit 4- If the machine max production capacity is 1000 units per month, what is the selling price he should set to break even monthly? 5- If Khaled to earn a profit equal to his current salary, for how much he should sell the unit? 6- What is the fixed cost per unit for maximum production? 7. What is the total variable cost for maximum production? 8- If Khalid set the selling price for 70DHS and managed to reduce the total fixed cost by 2% what is the profit increase percentage 9. If Khalid set the selling price for 70DHS and managed to reduce the total variable cost by 2% what is the profit increase percentage

Answer 1

Answer

1.

Non Manufacturing Cost Fixed Costs Manufacturing Overhead Opportunity Cost Direct Cost Selling Cost Sunk Cost Variable Cost х X х X х х х х Factory Rent Utilities Cost of Course Equipment rent Material Labour Advertisement Current Salary х х х х х х х х х

2. Total Fixed Cost will be as under (Fixed Costs are not directly related to output, they will be incurred whatever the level of production is)

Fixed Costs (DHS per Month) 1000 500 Particulars Factory Rent Utilities Equipment rent Advertisement Total Fixed Costs per month 3000 3500 8000

3. Total Variable cost per unit will be as under (Variable Costs are directly related to output, they will be incurred according to the level of production)

Cost per unit (DHS per unit) 20 Particulars Material Labour Total Variable Cost per unit 12 32

4. Break Even Price per unit to sell 100% Output of 1000 units

In break-even analysis, sunk costs are not considered. Variable costs are at the unit of production level and fixed costs are considered in their totality. The objective is to calculate the number of units that must be sold to cover all fixed costs after subtracting variable costs.

8000 DHS 32000 DHS Total Fixed Costs per month Total Variable Costs per month (32 DHS per unit @ 1000 units) Total Recoverable Costs to be in breakeven per month (A) Max Capacity per month (B) Break even Selling price per unit (A/B) 40000 DHS 1000 units 40 DHS per unit

** Cost of Course 800 DHS is irrelevant for decision making. Further It is assumed that all the production of 1000 units is evenly sold.

5. To earn profit equal to current salary i.e 25000 DHS per month the selling price would be arrived as under

Break even Selling Price per unit + Current monthly salary need to be recovered from 1000 selling unit

40 DHS per unit + 25 DHS per Unit (25000 DHS /1000 units) = 65 DHS per unit will be selling price.

6. Fixed cost per unit for maximum production

Total fixed costs / Maximum Output

8000 DHS per month / 1000 units per month = 8 DHS per unit

7. As already calculated in point 3 above, total variable cost will be (Total Output x Variable Cost per unit)

1000 units @ 32 DHS per unit = 32000 DHS

8. Revised Selling Price = 70 DHS per unit

Reduced fixed Costs = 98% of old fixed costs i.e 7840 DHS per month (as there is 2% reduction means 100-2% = 98% will be new cost)

70000 Total Sales (1000 Units @70 DHS per unit) Less :Total Variable costs (1000 Units @32 DHS per unit Less:Total Reduced Fixed Costs (8000 DHS X98%) 32000 7840 Revised profit 30160

Percentage increase in profit = (30160-25000)/25000 *100 = 20.64%

9. Reduced Variable Cost = 32 DHS per unit @98% = 31.36 per unit

Total Sales (1000 Units @70 DHS per unit) Less:Reduced Variable costs (1000 Units @31.36 DHS per unit Less:Total Fixed Costs 70000 31360 8000 Revised profit 30640

Percentage increase in profit = (30640-25000)/25000 *100 = 22.56%