Question

Jeweled Outlook is analyzing a proposed project with expected sales of 9,200 units, ±4 percent. The expected variable cost per unit is $26 and the expected fixed costs are $49,000. Cost estimates are considered accurate within a range of ±5 percent. The depreciation expense is $18,300. The sale price is estimated at $52 a unit, ±3 percent. If the company conducts a sensitivity analysis using a variable cost of $27, what will be the total variable cost estimate?

Answer 1

To calculate the total variable cost estimate, you can use the expected sales and the expected variable cost per unit, accounting for the given ranges.

Expected sales are 9,200 units with a range of ±4 percent, which means the minimum and maximum sales are:

Minimum Sales = 9,200 units - (4/100 * 9,200 units)
Maximum Sales = 9,200 units + (4/100 * 9,200 units)

Now, calculate the minimum and maximum variable costs per unit using the given variable cost per unit of $26 and the allowed range of ±5 percent:

Minimum Variable Cost per Unit = $26 - (5/100 * $26)
Maximum Variable Cost per Unit = $26 + (5/100 * $26)

Now, calculate the total variable cost estimates for both the minimum and maximum values:

Minimum Total Variable Cost = Minimum Sales * Minimum Variable Cost per Unit
Maximum Total Variable Cost = Maximum Sales * Maximum Variable Cost per Unit

Substitute the values:

Minimum Total Variable Cost = (9,200 - (4/100 * 9,200)) * ($26 - (5/100 * $26))
Maximum Total Variable Cost = (9,200 + (4/100 * 9,200)) * ($26 + (5/100 * $26))

Now, calculate these values:

Minimum Total Variable Cost ≈ 8,827.20
Maximum Total Variable Cost ≈ 9,754.40

So, with a variable cost of $27, the total variable cost estimate would fall within the range of approximately $8,827.20 to $9,754.40, depending on the actual sales and variable cost per unit within their respective allowed ranges.