Forecast Profit

beavis182beavis182 Well-KnownPosts: 130Registered
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??

Comments

  • SandyHoodSandyHood Font Of All Knowledge Posts: 2,034Registered, Moderator
    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
    Sandy
    [email protected]
    www.sandyhood.com
  • PGMPGM Font Of All Knowledge Posts: 1,954Registered
    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?
  • beavis182beavis182 Well-Known Posts: 130Registered
    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??
  • beavis182beavis182 Well-Known Posts: 130Registered
    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?
  • sammyd22sammyd22 Well-Known Posts: 207Registered
    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.
  • beavis182beavis182 Well-Known Posts: 130Registered
    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?
  • sammyd22sammyd22 Well-Known Posts: 207Registered
    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
  • beavis182beavis182 Well-Known Posts: 130Registered
    :-) 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?
  • sammyd22sammyd22 Well-Known Posts: 207Registered
    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.
  • beavis182beavis182 Well-Known Posts: 130Registered
    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 :-)
  • SandyHoodSandyHood Font Of All Knowledge Posts: 2,034Registered, Moderator
    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.
    Sandy
    [email protected]
    www.sandyhood.com
  • SandyHoodSandyHood Font Of All Knowledge Posts: 2,034Registered, Moderator
    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%)
    Sandy
    [email protected]
    www.sandyhood.com
  • Dipak ThankiDipak Thanki Well-Known Posts: 135Registered
    Fixed Cost (£) + Target Profit (£)/Contribution per unit (£)
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