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E co makes two products- X and Y- Budgeted details are as fallows
X Y
$ $
Selling Price 24.00 19.20Cost Per unit:
Direct Material 8.40 9.60
Direct Labor 3.60 2.40
Variable Overhead 1.44 0.96
Fixed Overhead 2.88 2.40Profit per unit 7.68 3.84
The fixed overhead included in X relates to an apportionment of general overhead cost only. However Y also includes specific fixed overhead totalling to $6,000
If only product X were to be made, How many units would need to be sold to in order to achieve a profit of $144,000?
X makes a contribution of 7.68 + 2.88 = 10.56 per unit.
The total fixed overheads at the moment are (10,000 x 2.88) + (12,500 x 2.40) = 58,800
(you did not copy the budgeted units in your question).If Y is not produced, then the total fixed overheads fall by 6,000 to 52,800.
To achieve a profit of 144,000 they need to get a contribution from X totalling 144,000 + 52,800 = 196,800
So the number of units of X that need to be sold is 196,800 / 10.56 = 18,636 units
if i may ask, since Y is not produced the only reason why we’re not excluding the $24,000 is because it relates to general overheads?
Correct – the general overheads will still be incurred whatever we decide to produce.
thank you, i have another question as regards relevant costing, when dealing with relevant costs for labour if labour is fully utilized, the relevant consists of the contribution forgone in the other product plus the current cost of labour per hour, is this correct
i saw a bpp question in which after doing this, a variable overhead cost was included in the computation
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