Financial & Management Accounting Selling Price of Essay

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Financial & Management Accounting

Selling price of the AOK Play

Contribution per unit = Selling price per unit -- variable cost per unit

total variable cost (= total cost -- total fixed costs) / sales

(3,600,000 -- 2,100,000) / 80,000

(1,500,000 / 80,000)

Selling price = $50 per unit

Fixed cost per unit

Fixed cost per unit = total fixed costs / sales

= 2,100,000 / 80,000

= $26.25per unit

Total cost per unit

Total cost = total variable cost + total fixed costs

= 18.75 x 80,000 + 2,100,000

= 1,500,000 + 2,100,000

= 3,600,000

Cost per unit = total cost / sales

= 3,600,000 / 80,000

= $45per unit

Contribution margin

Contribution margin per unit = total contribution / sales

= 2,500,000 / 80,000

= $31.25per unit

Question 2

Expected Profits and Breakeven

Preliminary Projections

Breakeven = total fixed costs / contribution per unit

= 2,100,000 /

= 67,200

For this projection, the company should sell 67,200 product units before breaking even. This means that for the company to realize any profit, the stipulated number of products must be sold first.

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For this projection the profit the company will realize is the remaining units' sales. Selling the remaining product units is the company's profit. The profit thus = remaining units x selling price = (80,000 -- 67,200) x 50 = $640,000. Therefore this projection will give the company this profit margin.

Production Manager's Proposal

The production manager proposes a selling price of $45 which would increase sales by 25% putting the sales at 100,000 units. He further states this would increase fixed production overhead by 50,000 and fixed marketing overhead by 25,000.

This would increase fixed costs by 75,000 resulting to fixed costs of (2,100,000 + 75,000) 2,175,000.

Variable costs per unit = 18.75

Selling price per unit = 45

Contribution per unit = selling price -- variable costs

= 45 -- 18.75

= 26.25

Breakeven = total fixed costs / contribution per unit

= 2,175,000 / 26.25

= 82,857

According to this projection, the must sell 82,857 units before breaking even. Though the number of product unit before earning any profit is high, this projection.....

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