Question

The following data relate to a year's budgeted activity (100,000 units) for Lucky Locks, a single-product company:

	Per Unit
Selling Price	$5.00
Variable manufacturing cost	$1.00
Variable marketing cost	$2.00
Fixed manufacturing cost (based on 100,000 units)	$0.25
Fixed marketing cost (based on 100,000 units)	$0.65

Total fixed costs remain unchanged between 25,000 units and total capacity of 160,000 units.

Lucky received an order for 20,000 units to be used in an unrelated market. The sale requires production of 20,000 extra units to be used in an unrelated market.

What price per unit should Lucky charge on the special order to increase its operating profit by $30,000?

Select one:

a. $ 4.5)

b. $ 5.00

c. $ 3.00

d. $ 3.50

Question 2

Currently, a company has fixed costs of $32,500, a contribution ratio of 65%, and is selling its product for $12 per unit. If the sales price per unit is increased by $4, how much less will the break-even point in sales be when compared to the current condition?

Select one:

a. $ 5,932

b. $ 13,414

c. $ 14,411

d. $ 17,500

Answer 1

Solution :

Answer (1) :

The Answer is (a) $ 4.50.

Working :

Additional Contribution required per units on order = Total Increment in income / Order Units

= $ 30,000 / 20,000

= $ 1.50

Price to be charged = Variable Cost + Contribution per Unit

= ( $ 1 + $ 2) + $ 1.5

= $ 4.50

Answer (2) :

The Answer is (a) $ 5,932.

Working :

Current Breakeven Sales in $ = Fixed Cost / Contribution Ratio

= $ 32,500 / 0.65

= $ 50,000

Variabe Cost per Units = $ 12 * 0.35

= $ 4.2

If Sales price per Units increased by $ 4 then contribution per Units = $ 16 -$ 4.2

= $ 11.80

Contribution Ratio = $ 11.80 / $ 16

= 73.75%

Revised Breakeven Sales in Dollars = $ 32,500 / 0.7375

= $ 44,068

Reduction in breakeven Sales in Dollars = $ 50,000 - $ 44,068

= $ 5,932

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