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A company has a single product with a selling price of $12/unit,which is calculated as variable cost/unit, plus 20%. At an output level of 5000 units it makes a loss of $8000
What is the company’s total fixed cost?
Solution
(5000×12×20÷120)+8000 =18000
Can you explain it to me Sir?For every $100 variable cost, the contribution must be 20% x $100 = $20, and the selling price must be $120.
Putting it the other way round, for every $120 selling price, the contribution must be $20.Therefore, for a selling price of $12, the contribution must be 20/120 x 12 = $2 per unit.
Therefore the total contribution for 5,000 units is 5,000 x $2 = $ 10,000.
Given that they make a loss of $8,000, the fixed overheads must be $18,000.
(10,000 – 18,000 = -8,000)
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