Cost Assumptions

- Production of 1500 units, total sales DM 180,000

Selling price per unit =180,000/1500=120

Income statement

Sales | 180,000 |

Less Variable Costs | 69,000 |

Contribution to Margin (Sales-variable costs) | 111, 000 |

Less Fixed Costs | 140, 000 |

Net Profit | -29, 000 |

Total variable cost (31+15)*1,500=69,000)

- There is a special order of 400 units to be sold at DM50.

Computation of the new income statement

Income statement

Sales (180,000+20,000) | 200,000 |

Less Variable Costs (1500+400*46) | 87,400 |

Contribution to Margin (Sales-variable costs) | 112,600 |

Less Fixed Costs | 140, 000 |

Net Profit | -27,4000 |

- Compute the number of units the company should sell to achieve the targeted income

Sales to earn DM 30,000

= (fixed cost+ target profit) /contribution margin for each unit

Fixed costs=90,000+50,000=140,000

Target profit=30,000

Therefore, the number of units the company should sell to get a net income of DM 30,000 is computed as follows; (fixed cost+ target profit) /contribution to margin for each unit

= (140,000+30,000)/ (120-46)

= 170,000/74

=2297.297 units

Therefore, the company should produce 2297 units to realize a net income of DM 30, 000

- Explain what will happen when variable costs are increased or decreased

a). If the variable cost is increased, then more units will be required to achieve the targeted income. Let us assume that the variable cost is increased to 60.

The number of units will be as follows;

= (140,000+30,000)/ (120-60)

=170,000/60

=2833.33

The number of units that should be sold will be 2833 to realize a profit of DM30, 000.

B). On the other hand, if the variable costs are decreased, then less units will be sold to realize a profit of DM 30, 000 as shown below;

Lest assume the variable cost is decreased to say, 30

The number of units will be calculated as follows

(140,000+30,000)/ (120-30)

=170,000/90

=1888.88

Therefore, 1889 units should be sold to realize a profit of DM 30, 000.

- What happens when the fixed costs are increased or decreased

When the fixed costs are decreased, then fewer units should be sold to realise the set target. The reverse is also true.

a). Let us assume the fixed costs are decreased to 120,000

The number of units will be calculated as follows

(120,000+30,000) / (120-46)

=2027.027

Therefore, 2027 units should be sold to have profits of DM 30, 000.

b). Lets assume that fixed cost are increased to 150, 000

The number of units will be calculated as follows

(150, 000+30, 000)/ (120-46)

=180, 000/74

=2432.43

Therefore, 2432 units should be sold

F). what happens when the selling price is increased by 10%, while other cost remain constant

Sales (180,000+18,000) | 198,000 |

Less Variable Costs (1500*46) | 69,000 |

Contribution to Margin (Sales-variable costs) | 129,000 |

Less Fixed Costs | 140, 000 |

Net Profit | -11,000 |

In this case, the loss goes down.

Limitation: It is assumed that the selling price and fixed costs are the same

G). Assume the capacity and sales are double to 4, 800 unit. Compute the net income if facilities costing 500, 000 DM are added at 5-year life

Sales (4,800*120) | 576,000 |

Less Variable Costs (4800*46) | 220,800 |

Contribution to Margin (Sales-variable costs) | 355,200 |

Less Fixed Costs (100,000+140000 | 240,000 |

Net Profit | 115,200 |

The selling price is DM120 and the fixed cost has been increased by 100, 000 DM, which is calculated as follows;

The cost of the facilities/ life

=500,000/5

=DM 100,000

References

Heisinger, K. (2009).*Essentials of Managerial Accounting*. London: engage Learning.

Kinney, R. M., & Raiborn, A. C. (2012). *Cost Accounting: Foundations and Evolutions, *(9)th Ed.* Foundations and Evolution*, London: Cengage Learning.

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