Question

The company’s marketing department estimates that the demand for the new toy range between 10 000 units and 40 000 units per month. The new toy will sell for $9.00 per unit. Enough capacity exists in the company’s plan to produce 15 000 units of toys each month. Variable expense to manufacture and sell one unit would be $5.00, and incremental fixed expense associated with the toy would total $32 000 per month.

Business has also identified an outside supplier who could produce the toy for a price of $4.00 per unit plus a fixed fee $29 000 per month for any production volume up to 15 000 units. For production volume between 15 001 and 35 000 units the fixed fee would increase to a total of $58 000 per month.

if the business outsources all production to the outside supplier, how much profit will the company earn if it sales 40 000 units?

Answer 1

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The company’s marketing department
Workings	Amount $	Note
Units sold	40,000.00	A
Sell price per unit	9.00	B
Sale value	360,000.00	C=A*B
Purchase price per unit	4.00	D
Purchase cost	160,000.00	E=A*D
Income Statement	Amount $	Note
Sale value	360,000.00	See C
Less: Variable costs
Purchase cost	160,000.00	See E
Contribution	200,000.00	F=C-E
Less: Fixed costs	58,000.00	G
Operating Profit	142,000.00	H=F-G