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    Cost Volume Profit Analyses

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    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?

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    https://brainmass.com/business/cost-volume-profit-analysis/cost-volume-profit-analyses-537021

    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.

    $2.19

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