Question

A company manufactures a single product which has the following cost structure

based on a production budget of 10,000 units.

Materials - 4 kg at $3/kg $12

Direct labour - 5 hours at $7/hour $35

Variable production overheads are recovered at the rate of $8 per direct labour

hour.

Other costs incurred by the company are:

$

Factory fixed overheads 120,000

Selling and distribution overheads 160,000

Fixed administration overheads 80,000

The selling and distribution overheads include a variable element due to a

distribution cost of $2 per unit. The fixed selling price of the unit is $129.

You are required to;

(a) Calculate how many units have to be sold for the company to breakeven.

(b) Calculate the sales revenue which would give a net profit of $40,000.

(c) If the company could buy in the units instead of manufacturing them,

calculate how much it would be prepared to pay if both:

(i) estimated sales for next year are 9,500 units at $129 each; and

(ii) $197,500 of fixed selling, distribution and administrative overheads

would still be incurred even if there is no production (all other fixed

overheads would be saved).