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Cost Volume Profit Analyses

After reviewing its cost structure (variable costs of £7.50 per unit and monthly fixed costs of £60,000) and its potential market, the Forecast Company established what it considered to be a reasonable selling price. The company expected to sell 50,000 units per month, and planned its monthly results as follows:

£
Sales 500,000
Variable costs 375,000
Contribution margin 125,000
Fixed costs 60,000
Profit before tax 65,000
Income tax (at 40%) 26,000
Net profit 39,000

Required:

(a) What selling price did the company establish?

(b) What is the company's contribution margin per unit?

(c) What is the company's break-even point in units?

(d) If the company determined that a particular advertising campaign had a high probability of increasing sales by 4,000 units, how much could the company pay for such a campaign without reducing its planned profits?

(e) If the company wanted to make a before-tax profit of £50,000, how many units would it have to sell?

(f) If the company wanted to make a before-tax return-on-sales of 10%, what level of sales, in £, would be needed?

(g) If the company wanted to make an after-tax profit of £90,000, how many units would it have to sell?

Solution Preview

Please see attached document; thank you.

Required:

(a) What selling price did the company establish?
Selling price = Sales / Units = 500,000 / 50,000 = 10 £/unit

(b) What is the company's contribution margin per unit?
Contribution margin / Units = 125,000 / 50,000 = 2.5 £/unit
Also, Selling price - Variable costs per unit = 10 - 7.50 = 2.5 £/unit

(c) What is the company's break-even point in units?
Break-even = Fixed costs / ...

Solution Summary

Cost volume profit analyses given various scenarios, and calculating average costs, break-even point, and profit levels.

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