Financial Performance

varker1985

Can anyone help with the following question?

Demand = 8000 units
Selling price per unit = £49
Raw material cost per unit = 3kg @ £5 per kg
Labour cost = 1.25 hrs @ £12.80 per hr
Fixed costs per unit = £4

Calculate the following

Full production cost per unit ?
Contribution per unit ?
Contribution per kg of material ?
Material allocated to each product ?
Number of units to produce ?

Thanks
Vic

SandyHood

Vic
It is critical that you find the total fixed cost.
I have to assume from the information you have given that total fixed costs are £32,000. If this is the budgeted total fixed cost for the period. I also assume that forecast sales are 8,000 units.

Based on these 2 assumptions the fixed cost per unit is £4.00

SandyHood

Full production cost per unit means the total cost of making one unit.
Direct material cost
+
Labour cost
+
Fixed production cost
=
Total

SandyHood

D materials 3 x £5 = £15.00
Labour 1.25 x £12.80=. £16.00
Fixed cost per unit =. £4.00
Full production cost per unit = £35.00

SandyHood

Contribution per unit means price less variable cost per unit.
We assume that material and labour costs are variable.
Price .....................£49.00
Variable Costs
Materials................£15.00
Labour....................£16.00
Total V Cost............£31.00
Contribution per unit £18.00

SandyHood

Contribution per kg
Divide the contribution per unit by the material per unit
Contribution per unit £18.00
Divided by
Kg per unit.................3.00 kgs

Contribution per kg.... £6.00 per kg

SandyHood

Material allocated to each product.
You have only given information for one product

On the basis that 8,000 will be made and sold and each unit requires 3kgs
Then the total material requirement is
8,000 x 3 kgs = 24,000 kgs

SandyHood

How many units to produce.
There is no information about availability of materials and labour time and no suggestion that the fixed costs would limit the number of units that can be produced.
On that basis produce 8,000

With a profit per unit of £14.00
8,000 units will generate £112,000 profit

Sandy
sandy@sandyhood.com
www.sandyhood.com

varker1985

Thanks, this is great Sandy.
The only thing it states on the question is 'raw material is in short supply and the company has been informed that only 32,000 kilograms of the material will be available next month'
As for the number of units to produce would that still stay as 8000?
If you want me to email the full question, I can
Thanks again.

Vic

SandyHood

If you email the full question I think it would help.
I think that what is here is incomplete.

It might be a limiting factors question.
If so the limit of 32,000 kgs of raw material would be significant.
As it stands we can sell 8,000 units of a product. Each unit requires 3 kgs. We need 24,000 kgs. So a restriction of only 32,000 kgs being available is of no significance. We don't even want the full 32,000 kgs available.