Rumpole Ltd is proposing an expansion of their product range by manufacturing a
new product. It is proposed that the new product will sell for £15 per item and will have a market of between 10,000 and 15,000 items per year. An analysis of the costs at
these levels of production is:

Question

Accepted Answer

Units:	10,000 £	15,000 £	+5,000 £
Total costs	160,000	210,000	+50,000

Therefore, variable costs = £50,000/5,000 units = £10 per unit Variable costs
@ £10 per unit: 100,000 for 10,000 units; 150,000 for 15,000 units
Answer: fixed costs = £60,000
(b) Break-even = Fixed costs/contribution per unit
Contribution per unit = Selling price (£15) – Variable cost (see (a) above) (£10) = £5
Therefore the break-even point = £60,000/£5 = 12,000 units.
To earn a profit of £13,000, total contribution must be:
Fixed costs £60,000 + Profit £13,000 = £73,000
As contribution per unit is £5, they must sell £73,000/5 = 14,600 units.
(c) If only 7,000 units were manufactured and sold, the total contribution would
be 7,000 × £5 = £35,000, which is £25,000 less than the fixed costs of £60,000.
Therefore, a loss of £25,000 is made.

Units:	10,000 £	15,000 £
Materials	40,000	60,000
Labour	70,000	95,000
Overheads	50,000	55,000

Question 10.st.5: Rumpole Ltd is proposing an expansion of their product range...

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