Question

Barker Ltd makes a single product that is sold for £45 each. Fixed costs are £​100,000 and variable costs per unit are £20. The company has made heavy losses in recent years but is slowly reducing the scale of these losses. For the forthcoming​ year, the target loss is £​10,000.

How many units must be produced to achieve this​ target?

A. ​3,600 units
B. ​4,000 units
C. ​4,500 units
D. ​4,400 units

Answer 1

Barker Ltd must produce 4,400 units to achieve the target loss of £10,000. This amount is calculated by dividing the sum of fixed costs and target loss by the contribution per unit.

Step-by-step explanation:

The question is asking how many units Barker Ltd must produce to achieve a target loss of £10,000. First, we'll calculate the contribution per unit by subtracting the variable cost per unit (£20) from the selling price (£45), which is £25. Since the target loss is £10,000 and fixed costs are £100,000, the total amount to cover is £100,000 + £10,000 = £110,000. Dividing the total amount by the contribution per unit gives us the number of units to break even and achieve the target loss.

Total required contribution = Fixed costs + Target loss
= £100,000 + £10,000
= £110,000

Contribution per unit = Selling price - Variable cost per unit
= £45 - £20
= £25

Units required to break even = Total required contribution / Contribution per unit
= £110,000 / £25
= 4,400 units

Therefore, Barker Ltd must produce 4,400 units to achieve the target loss of £10,000, which corresponds to option D.