Question

The data below pertain to the forecasts of XYZ Company for the upcoming year. Total Cost Unit Cost Sales (40,000 units) $1,000,000 $25 Raw materials 160,000 4 Direct labor 280,000 7 Manufacturing overhead: Variable 80,000 2 Fixed 360,000 Selling and general expenses: Variable 120,000 3 Fixed 225,000 ________________________________________ Assuming that XYZ Company sells 80,000 units, what is the maximum that can be paid for an advertising campaign while still breaking even?

Answer 1

Selling price per unit = 25

variable cost for 40000 units = material + labour + variable manufacturing overhead + variable selling expenses

variable cost for 40000 units = 160000 + 280000+ 80000 + 120000

variable cost for 40000 units= 640000

variable cost per unit = 640000/40000 = 16 per unit

contribution per unit = selling price per unit - variable cost per unit

contribution per unit = 25 - 16 = 9

To break even, ( for 80000 units)

fixed costs = contribution

fixed manufacturing iverhead + fixed selling expense+ advertising cost = 9 x 80000

360000 + 225000 + advertising = 720000

advertising = 7200000 - 585000

advertising = 135000