1. Tesco Ltd. manufactures and sells a single product. The following data have been extracted from the current years budget:

Sales and production (units) 5,000

Variable cost per unit 50

Fixed cost per unit 70

Contribution to sales ratio 75%

The selling price per unit for next year is to be 8% above the current years budgeted figure, whereas both the variable cost per unit and the total fixed costs are forecast to increase by 12% above their budgeted level in the current year.

The target for next year is that total profit should remain the same as that budgeted for the current year.

Required:

1. Calculate for the CURRENT YEAR the budgeted: (i) contribution per unit; and (ii) total profit.
2. Calculate the number of units which the company should produce and sell next year in order to achieve the target level of profit.
3. Explain, with an example, the term semi-variable (mixed) cost. How would such a cost be dealt with in undertaking the analysis in (a)?

the answer is

I didn't understand why they calculated the selling price as 50*(100/25)*1.08?

is there another way to obtain the same answer?

(a) Calculations for the current year: (1) Contribution per unit 50 x (75 + 25) = 150 '000 (ii) Total contribution (5,000 x 150) 750 Less Total fixed costs (5,000 x 70) (350) Total profit 400 (b) Calculations for next year: /unit Selling price 50 (100 + 25) x 1.08 216 Less Variable cost (50 x 1.12) (56) Contribution 160 '000 Total fixed costs (5,000 x 70) x 1.12 392 Target/required profit (as per (a)(ii)] 400 Required contribution for next year 792 Number of units required - (792,000 + 160) = 4,950 units