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P Co makes two products, P1 and P2. The budgeted details for each product are as follows:
P1 P2
$ $
Selling price 10.00 8.00
Cost per unit:
Direct materials 3.50 4.00
Direct labour 1.50 1.00
Variable overhead 0.60 0.40
Fixed overhead 1.20 1.00
––––– –––––
Profit per unit 3.20 1.60
––––– –––––
Budgeted production and sales for the year ended 30 November 20X5 are:
Product P1 10,000 units
Product P2 12,500 units
The fixed overhead costs included in P1 relate to apportionment of general overhead costs
only. However, P2 also included specific fixed overheads totalling $2,500.
If only product P1 were to be made, how many units (to the nearest whole unit) would
need to be sold in order to achieve a profit of $60,000 each year?
A 25,625 units
B 19,205 units
C 18,636 units
D 26,406 unitsSir in the above question, the only thing in which I am stuck is that how to calculate fixed cost. Can you please explain me?
The total budgeted fixed costs must be (10,000 x $1.20) + (12,500 x $1.00) = $24,500.
The actual fixed costs will stay the same (they are not affected by the level of production, by definition) except for the fact that if P2 is not produced then the specific fixed costs of $2,500 will not be there and so the total fixed costs will be $22,000.
OK. Sir in Jewel co June 2016 question, there was a statement regarding fixed cost which was correct but I did not understand it, can you please explain. It was as follows
Increasing batch sizes from 1000 units to 2000 units would dramatically reduce setup cost and increase profits.
I don’t know where you found this statement, because it is not in the examiners answer and would be irrelevant for this question anyway.
Set-up costs would only be relevant if they were producing their own units – they are not, they are buying from elsewhere and are specifically buying in batches of 1,000.
If it had been the case that they were producing themselves, then bigger batch sizes would mean fewer set-ups to produce the same total quantity and therefore a lower set-up cost. However, again, that is not the case here and that statement is of no relevance.
Hi John, Could you help me please?
I couldn’t calculate the contribution in this case. I don’t understand why the contribution is 3.20+1.20 =4.40.
Thank you in advance.
Claudia
The contribution is the selling price less the variable costs. This is always going to be the same as the profit plus the fixed costs. Try it yourself and see 🙂
Hi John, thank you for your time in reply.
Well…that was the perspective I needed.
Thank you for open my eyes.
Kind Regards
Claudia Brunharo
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