Forecast Profit

beavis182

Can someone help me work out how to find the forecast profit?

if a product has a forecast profit of '£' and an order quantity of 'x' how much must variable costs go up before the break-even point is reached??

SandyHood

beavis182
I'm sorry I don't understand your question
I look at forecast profit on the cost behaviour blog
Email me if you'd like it sent as an attachment

And please re-word your question

PGM

Go up by the amount of profit?

Although you don't mention fixed costs, which would need to be split over each unit of production first.

Maybe if you put the whole question on here?

beavis182

ok, im guessing it relates to the previous question which was:

Contribution of £10 and fixed costs of £7000. how many units to sell to make a profit of £4000. I worked that out as

fixed costs + target profit
divided by
contribution per unit = numbers of units which i worked out as 1100 units??

beavis182

then the next question is:

with a forecast profit of £500 for order quanity 25. how much must variable costs go up before the break even point is reached?

£500/25 = £20 selling price per unit?

not sure what to do now?

sammyd22

beavis182 wrote: »

ok, im guessing it relates to the previous question which was:

Contribution of £10 and fixed costs of £7000. how many units to sell to make a profit of £4000. I worked that out as

fixed costs + target profit
divided by
contribution per unit = numbers of units which i worked out as 1100 units??

Yes!

Total Fixed costs/ Contribution Per unite = BEP in Units

Total Fixed Costs + Desired Profit/Contribution Per Unit = BEP In Units

Multiply any of the above by your selling price and you will have your BEP in Sales Revenue.

beavis182

so i right in thinking the sales revenue would be £22000 giving a price per unit of £20

total cost per unit of £16.36?

sammyd22

beavis182 wrote: »

ok, im guessing it relates to the previous question which was:

Contribution of £10 and fixed costs of £7000. how many units to sell to make a profit of £4000. I worked that out as

fixed costs + target profit
divided by
contribution per unit = numbers of units which i worked out as 1100 units??

beavis182 wrote: »

so i right in thinking the sales revenue would be £22000 giving a price per unit of £20

total cost per unit of £16.36?

For the above question the answer is as follows:

Fixed Cost + Desired Profit (7,000+4,000 = ) £11,000/10 = 1,100 Units

1,100 Units x £20 = £22,000 which is your BEP in sales revenue.

Total cost per Unit = (FC -£7,000/ 1,100 Units = ) £6.36
Therefore, FC Per Unit - £6.36 + VC Per Unit - £10 = £16.36

So you are perfectly Correct!

Thanks

beavis182

:-) YAY perfect.

Now just need to work out the second part where i need to work out how much variable cost needs to go up before BEP is reached?

Do you know the formula for this?

sammyd22

beavis182 wrote: »

:-) YAY perfect.

Now just need to work out the second part where i need to work out how much variable cost needs to go up before BEP is reached?

Do you know the formula for this?

Wouldnt this be to take your £10 variable cost and multiply it by £1,100 = £11,000??

Therefore, Desired Profit = £4,000 + FC - £7,000 + Total Variable Cost - (£10*1,100 = ) £11,000. - Total £22,000.

Which is you BEP in sales revenue, where your total costs + Desired Profit meet your Revenue Needed.

Hope this helps you.

beavis182

not sure on the last bit really, seems like a silly question and is hard to understand.

Thanks for your all your help, im glad i got the first part right anyway :-)

SandyHood

I have extracted this from the postings already made:
Price ........................ £20.00
Variable cost per unit .. £10.00
Contribution per unit ..- £10.00

Forecast sales ............ 1,100 units
Total contribution ........ £11,000
Fixed cost ................... £7,000
Profit .......................... £4,000

Assuming I've got this right,then the variable costs would have to rise by £4,000 to take the profit from £4,000 to the breakeven level at 1,100 units.

So £4,000 divided by 1,100 would give you the value of the increase per unit.
£4,000 = £3.63(6363)
1,100 units

As a % of the opriginal variable cost this is an increase of £3.64/£10.00 x100 = 36.36%

In a minute I'll post a formulaic solution.

SandyHood

You know the standard formula for profit in a marginal costing format

(Price per unit - variable cost per unit) x units sold - fixed costs = Profit

In this examaple

[(£20 - £10) x 1,100] - £7,000 = £4,000

So to lower the profit to £0 you need to increase the variable cost to the point where

(Price per unit - variable cost per unit) x units sold = fixed cost

so divide both parts by units sold to give

Price per unit - variable cost per unit = fixed cost
................................................... units sold

So you need the Price per unit - variable cost per unit (or contribution per unit) to be equal to the fixed cost per unit

In this example:
£20 less variable cost = £7,000........ = £ 6.36(3636)
.......................... 1,100 units

So price - fixed cost per unit = variable cost per unit at breakeven

£20.00 - £6.36 = £13.64

As the original variable cost was £10.00 per unit this is a £3.64 increase (36.36%)

Dipak Thanki

Fixed Cost (£) + Target Profit (£)/Contribution per unit (£)