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Finance

4.22 Breakeven point; profit; cost function Chloe Enterprises operates a single-product entity. Data relating to the product for 2016 were as follows: Annual volume Selling price per unit Variable manufacturing cost per unit Annual fixed manufacturing costs Variable marketing and distribution costs per unit Annual fixed non-manufacturing costs 32 000 units $60 $28 $120 000 $12 $360 000 Required Calculate the break-even units for 2016. (b) Calculate the profit achieved in 2016. (C) Changes in marketing strategy are planned for 2017. This would increase variable marketing and distribution costs by $4 per unit, and reduce fixed non-manufacturing costs by $80 000 per year. Calculate the units that would need to be sold in 2017 to achieve the same profit as in 2016. (d) Would you recommend the change? Explain. (L02,3)

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a) The Break even units (B) is the point at which Total Revenues = Total Cost

So, B*60 = B*28+120000+B*12+360000

=> B = 480000/20 = 24000 units

So, Breakeven occurs at 24000 units in 2016

b) Profit in 2016 = Total Revenue at operating volume - Total Costs

=32000 * 60 - (32000*28+120000+32000*12+360000)

=$160000

c) New Variable Marketing and Distribution Costs = $12+ $4 = $16 per unit

New Fixed Non Manufacturing costs = $360000- $80000 = $280000

To achieve the same profit of $160000, No of units to be sold (B) is given by

Total Revenue - Total cost = 160000

=> B*60- (B*28+120000+B*16+280000)= 160000

=> B*16 = 160000+ 400000 = 560000

=> B = 35000

So, 35000 units must be sold to achieve the same profit as in 2016

d) As the no of units to achieve the same profit has increased to 35000, the change is not recommended

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