Question

ABC mfg co has estimated breakeven volume of 50,000 units for its new widget. If fixed costs are $100,000, unit selling price is $25.00 and ABC sales force commission is 8% of selling price, what is the non-comission unity variable cost?

Answer 1

We have to calculate the non commission variable cost per unit (a variable cost which does not include commission cost, which variable in nature.

Sale Price per unit - (Total variable cost per unit) = contribution per unit

Important Point

• Now we know the "Sales price per unit" but we don't know the value of "Contribution per unit" to find Total variable cost per unit

So we will have to find the value of "Contribution per unit" by the following formula because we know values of all the variables except "Contribution per unit":

Breakeven Units = Fixed cost / Contribution per unit

Rearranging formula:

Contribution per unit = Fixed cost / Breakeven Units

Now by putting values:

Contribution per unit = $100,000 / 50,000 Units = $2 per unit

Now putting this value in the following formula:

Sale Price per unit - (Total variable cost per unit) = contribution per unit

Now by putting values:

$25.00 per unit - (Total variable cost per unit) = $2 per unit

- (Total variable cost per unit) = $2 per unit - $25 per unit= -$23 per unit

Eliminating minus sign by multiplying "-1" on both sides, we have:

Total variable cost per unit = $23 per unit

Now we know that this "Total variable cost per unit" includes Variable commission cost. To calculate non-commission unity variable cost, we have to deduct commission variable cost from "Total variable cost per unit".

Non-commission unit variable cost = $23 per unit - Variable commission cost............Equartion 3

Variable Commission Cost = Sales Price * 8%= $25 per unit * 8% = $2 per unit

Putting value of Variable Commission Cost in Equation 3:

Non-commission unit variable cost = $23 per unit - $2 per unit = $21 per unit