CVP Analysis and Profit Planning E12A BUSINESS APPLICATION C

CVP Analysis and Profit Planning E12A. BUSINESS APPLICATION Cos Cob Systems, Inc., makes heat-seeking missiles. It has recently been offered a government contract from which it may rcalize a profit. The contract purchase price is $130,000 per missile, but the number of units to be purchased has not yet been decided. The company\'s fixed costs are budgeted at $4,035,000, and variable costs are $68,500 per unit. LO4,5 1. Compute the number of units the company should agree to make at the stated con- tract price to carn a profit of $1,500,000. 2. Using a lighter material, the variable unit cost can be reduced by $1,730, but total fixed overhead will increase by $29,240. How many units must be produced to make $1,500,000 in profit 3. Given the figures in 2, how many additional units must be produced to increase profit by S1,264,600

Solution

Answer :-

Given is the contract purchase price = $130,000 per missile

Fixed cost are budgeted at $4,035,000 and variable costs are $68,500 per unit

1. To find the number of units to make to earn profit of $1,500,000.

Solution - Let the number of units be x

Hence, revenue -cost = Profit (where cost includes both variable and fixed cost )

130000(x) - { 4035000 + 68500(x)} = 1500000

solving for x we get

130000(x) - 68500(x) = 1500000 + 4035000

x = 5535000/ 61500

x = 90

Hence the company should manufacture 90 missiles at the contracted purchase price to earn profit of $1,500,000.

2. New Information about variable cost i.e. it is reduced by $1730 but fixed overhead increased by $29240

Hence units required to be manufactured to earn profit of $1,500,000 be x

130000 (x) - { 4064240 + 66770 (x)} = 1500000

63230 (x) = 5564240

x= 88 Missiles

3. to increase profit by 1264600 i.e. new profit required is$ 2,764.600

130000(x) - { 4064240 + 66770 (x) } = 2764600

63230 (x) = 6828840

X = 6828840/63230

X= 108

Hence additional units to be produced to earn additional return of 1264600 is 20 more missiles.