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Management have collected the following information:
Demand Probability (units)
Worst possible outcome 10,000 0·3
Most likely outcome 22,000 0·5
Best possible outcome 35,000 0·2
The selling price per unit is $25. The variable cost per unit is $8 for any production level up to 25,000 units. If the
production level is higher than 25,000 units, then the variable cost per unit will decrease by 10% and this reduction will apply to all the units produced at that level.
Total fixed costs are estimated to be $75,000.
Using probabilistic budgeting, what is the expected budgeted contribution of the product?A $282,000
B $357,000
C $287,600
D $362,600My question is I don’t see where they have decreased the 10% in variable costs… when demand > 25,000 which in this case is 35,000 contribution is 17.80 they have added the 10% instead of subtracting…
Thank you in advance…I do not know which exam you are referring to (whether it is in a Revision Kit or from the ACCA website).
However, if the variable cost decreases by 10% it become $7.20 per unit. Therefore the contribution per unit becomes 25 – 7.20 = $17.80.
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