FINANCIAL PERFORMANCE practice assessment help?!

gabriellenlewis

Hi everyone,

So i'm a little stuck on question 9 of the the practise assessment 1...

Alpha Limited is considering design a new product, product BPT, and will use target costing to arrive at the target costs of the product:

- Price has not been decided yet.
- if the price is set at £40, demand will be 500000 units.
- if the price is set at £50, demand will be 430000 units.
- the costs of the production include fixed production costs of £8500000, which will give production capacity of 500000 units.
- in order to produce above this level, the fixed costs will steup up by £1500000.
- the required profit margin in 30%.
- the variable cost per unit is £13 for production volume of 430000 units.
- the variable cost per unit is £12 for production volume 500000 units.


So, i see that to arrive at the correct answer for TARGET FIXED PRODUCTION COST PER UNIT if priced at £40, you must divide £8000000 by 500000. But why is this not £8500000/500000? And where does the point about costs stepping up by £1500000 come into anything, because it doesn't say anything about volume being greater than 500000 units?

So, I suppose my question is why is the TARGET FIXED PRODUCTION COST £8000000?


Thanks.

Adele69

I found this one a bit confusing too, but eventually worked it out though if it had been an actual exam question would have been stuffed, since I needed to write it out in such a way that it was much simpler.

At Sales Price £40 p/u volume is 500,000 units
Profit margin 30%
So the Costs 70% of £40 = £28 p/u
Variable Costs £12 p/u, so remainder is Targeted Fixed Cost £16
and £16 x 500,000 units = £8,000,000

So the £40 Sales Price won't meet the Fixed Costs of £8,500,000

At Sales Price £50 volume is 430,000 units
and Costs 70% of £50 = £35
Variable Costs £13, so remainder is Targeted Fixed Cost £22
and £22 x 430,000 units = £9,460,000

£50 SP will meet FC at Target Profit 30%