Problem:
On January 1, 2009, ABC Company started the business with AED 1,000,000. The Company intends to produce and sell a single product called Alpha. The following projections are extracted from its business plan for the upcoming year. The normal production capacity is per year is 40,000. However, the projected sales is 32,000 units.
All amounts are in AED.
Selling price 160
Variable cost (VC):
Direct labor 54
Direct material 26
Variable overhead 10
Variable selling expense 20
Variable Admin. Expense 10
The production of Alpha requires a regular maintenance of the machinery. The maintenance is a mix (semi variable) cost with the following components:
Variable cost per hour 10 (production process requires 2 hours of maintenance)
Fixed cost 110,000
Additional fixed costs are:
Selling 100,000
Administrative 300,000
Manufacturing 200,000
Required: Based on the above facts, please answer the following questions. Show your supporting calculations.
1. What is the break-even units in quantity?
2. What is the cost formula for Alpha?
3. What is the average cost of production per unit?
4. Using the CRM approach, would you recommend spending 100,000 in advertising to increase sales by 10%.
5. What is the projected level of income?
6. What would be the required level of sales if the company had a fixed target loss of 200,000 plus a variable profit equal to 10% of sales?
7. What would be the cost formula for the semi-variable cost?
8. What would be the minimum selling price for a one time sale of 4,000 units to a foreign customer?
9. What would be the anticipated profit of a single unit of Alpha.
10. What should be the selling price of Alpha, if the Company desires a 10% rate of return on its initial investment.
11. Write a brief introduction describing what is the objective of the assignment, introduce the subject of the discussion, and give a brief overview of what would be presented (discussed) in the report.
12. Write a brief summary. The purpose of the summary section is to present the highlights of the topics discussed in the report.