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Good day sir,
In reference to Example 1 on page 15 of the lecture notes:
The second part of the question asked for the maximum profit using conventional key factor analysis, I worked that profit as follows:
A: $2.00 x 19,000 units = $38,000
b: $2.00 x 10,000 units = $20,000
Total $58,000(The $2.00 profit per unit was given in the question)
However, from your lecture the profit is derived another way. If it’s not too much to ask can you explain why doing it my way would be incorrect?
Thank you in advance.
The profit of $2 per unit is after charging fixed overheads. But total fixed overheads will not change with the level of production – it is only the contribution that will change.
Your way assumes that the total fixed overheads will change with the production, which is not the case!!
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