Posted: April 26th, 2016

After reviewing its cost structure (variable costs of £7.50 per unit and monthly fixed costs of £60,000) and its potential market, the Forecast Company established what it considered to be a reasonable selling price. The company expected to sell 50,000 units per month, and planned its monthly results as follows:

£

Sales 500,000

Variable costs 375,000

Contribution margin 125,000

Fixed costs 60,000

Profit before tax 65,000

Income tax (at 40%) 26,000

Net profit 39,000

Required:

(a) What selling price did the company establish?

(b) What is the company’s contribution margin per unit?

(c) What is the company’s break-even point in units?

(d) If the company determined that a particular advertising campaign had a high probability of increasing sales by 4,000 units, how much could the company pay for such a campaign without reducing its planned profits?

(e) If the company wanted to make a before-tax profit of £50,000, how many units would it have to sell?

(f) If the company wanted to make a before-tax return-on-sales of 10%, what level of sales, in £, would be needed?

(g) If the company wanted to make an after-tax profit of £90,000, how many units would it have to sell?

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