Question

Simpson Company is analyzing whether its new product will be profitable. The following data are provided for analysis:

            Expected variable cost of manufacturing                   $30 per unit

            Expected fixed manufacturing costs                          $48,000 per year

            Expected sales commission                                         $6 per unit

            Expected fixed administrative costs                           $12,000 per year

a. [5 points] Simpson estimates that sales will probably be 10,000 units. What sales price per unit will allow the company to break even?

b. [5 points] Simpson has decided to advertise the product heavily and has set the sales price at $52. If sales are 9,000 units, how much can the company spend on advertising and still break even?

Answer 1

Total variable cost= Variable manufacturing + Variable sales

= $30 + $6

=$36

Total fixed cost= Manufacturing + Sales costs

= 48000+ 12000

=$60,000

a) Break even point= Fixed costs/ (Selling price- Variable cost per unit)

10000 = 60000/(SP- 36)

SP= 60000/10000 + 36

SP= $42

b)SP= $52

Sales= 9000 units

Let the advertising cost be A which is a fixed cost

Hence 9000=( 60000+ A)/(52-36)

9000= 60000+ A/ 16

A= (9000*16)- 60000

A= $84000

The company can spend $84000 on advertising ans still break even