Question

Breed Products has performed extensive studies on its costs and production and estimates the following annual costs based on 150,000 units (produced and sold):

Total Annual Costs (150,000 units)
Direct Material $200,000
Direct Labor $180,000
Manufacturing overhead $150,000
Selling, general, and administrative $100,000
Total = $630,000

a) Compute Breed's unit selling price that will yield a profit of $600,000, given sales of 150,000 units
b) Compute Breed's dollar sales that will yield a projected 20% profit on sales, assuming variable costs per unit are 60% of the selling price per unit and fixed costs are $225,000
c) Management believes that a selling price of $9 per unit is reasonable given current market conditions. How many units must Breed sell to generate the revenues (dollar sales) determined in requirement (b)?

Answer 1

(a) $8.20

(b) $1,125,000

(c) 125,000

Step-by-step explanation:

(a) Unit selling price:

= (Total cost incurred + Desired profit) ÷ Number of units sold

= ($630,000 + $600,000) ÷ 150,000

= $8.20

(b) Profit = Dollar sales - Variable cost - Fixed cost

($ sales × 20% profit) = $ sales - ($ sales × 60%) - $225,000

($ sales × 20% profit) = ($ sales × 40%) - $225,000

$225,000 = ($ sales × 40%) - ($ sales × 20% profit)

$225,000 = ($ sales × 20%)

Dollar sales = $225,000 ÷ 20%

= $1,125,000

(c) No. of units required to be sold:

= Dollar sales ÷ Selling price per unit

= $1,125,000 ÷ $9

= 125,000