Question 12.RQ.22: Data for questions 22 and 23 JJ Ltd manufactures a product...
Data for questions 22 and 23
JJ Ltd manufactures a product which has a selling price of £14, a variable cost of £6 per unit. The company incurs annual fixed costs of £24,400. Annual sales demand is 8,000 units. New production methods are under consideration, which would cause a 30 per cent increase in fixed costs and a reduction in variable cost to £5 per unit. The new production methods would result in a superior product and would enable sales to be increased to 8,500 units per annum at a price of £15 each.
If the change in production methods were to take place, the breakeven output level would be:
(A) 122 units higher
(B) 372 units higher
(C) 610 units lower
(D) 915 units higher
Question 23 Breakeven analysis
If the organisation implements the new production methods and wishes to achieve the same profit as that under the existing method, how many units would need to be produced and sold annually to achieve this?
(A) 7,132 units
(B) 8,000 units
(C) 8,500 units
(D) 9,710 units
Solution 22
● Calculate the breakeven point before and after the change in production methods, using the formula:
Breakeven point in units = \frac{Fixed costs}{Contribution per unit}
Answer: (A)
Existing situation :
Breakeven point = \frac{£24,400}{£8} = 3,050 units
Working :
Contribution per unit £
Selling price 14
Variable cost (6)
Contribution 8
New production methods :
Breakeven point = \frac{£24,400 ×1.3}{£10} = 3,172 units
Working :
Contribution per unit £
Selling price 15
Variable cost (5)
Contribution 10
Increase in number of units: 3,172 – 3,050 = 122.
Solution 23
● First calculate the existing profit level.
● Using the new cost and selling price, calculate the required sales volume using the
formula:
Required sales volume = \frac{Fixed costs + required profit }{Contribution per unit}
Answer: (A)
\frac{£31,720 + £39,600}{£15 – £5} = 7,132 units
(Working for existing profit: 8,000 units × £8 = £64,000 contribution less fixed costs £24,400 = £39,600)