Practice assessment 2 - Task 8 a & b

Zana

Hi,

Can someone please help me with the task in the attachment?
Any help would be much appreciated! Thanks you!

CornishPixie

Ok, looking at part A first::
Total anticipated sales revenue will be £18.00 x 20,000 units = £360,000
Target total operating profit will be £360,000 x 25% = 90,000
Target total costs will be £360,000 - £90,000 = £270,000
Target cost per unit (to 2 decimal places) will be £270,000 / 20,000 units = £13.50

For part B you follow the same principles:
Target operating profit will be 17.00 x 25% = £4.25
Target total cost per unit will be £17.00 - £4.25 - £12.75
Target fixed costs will be £12.75 - £7.00 = £5.75
(in case you need to enter the figure for manufacturing costs in any other practice papers, use the £140,000 (provided in the table at the top under variable manufacturing costs) and divide it by the number of units - so £140,000 / 20,000 units = £7)

For the last part, use the figures given in the table at the top.
You need to know the total costs for the production of 20,000 so 65,000 + 140,000 + 45,000 + 35,000 = £285,000
Less the variable costs (also in the table) will be £285,000 - £140,000 = £145,000 fixed costs
You need to divide the fixed costs by the number of units so £145,000 / 20,000 = £7.25 per unit
You can now complete the calculation by taking £145,000 / 5.75 (from first part of answer = 25217.39 rounded to 25217 as you need to show full units not parts of units.

Hope that helps.

Zana

Thank you @CornishPixie !

alexnwa

Thank you for your in-depth explanation.@CornishPish

Bran278

Can someone confirm why we divide the total fixed costs by the targeted fixed costs per unit in order to determine sales volume??? This is genuinely the first time I've heard of doing that. I thought it would be total fixed costs + targeted profit / contribution per unit???

CornishPixie

Hi Bran

The question asks what the sales volume will need to be.

You know that overall fixed costs are £145,000 and you also know that the target fixed costs are £5.75 per unit. Therefore, how many units will need to be sold at a target fixed costs of £5.75 to cover the actual fixed costs of £145,000.

Does that help?

JEA

Goddammit, I've been looking at this question perplexed for hours thinking just like Bran278, just why would it be that!!. THANKYOU !!! @Cornish Pixie, that makes soooooo much sense, I got the rest of the question spot on but was about to loose a Sunday afternoon and my state of mind to a 1 point question.

CornishPixie

You are very welcome JEA.