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Forecasting revenue and costs
With the help of your chief financial officer (CFO), you have put together the following preliminary budget figures based on last year's numbers for a planned production and sales level of 4,000 units per month:
Building depreciation $200,000/yr.
Machine operators $100,000/yr.
Management staff $400,000/yr.
Direct materials $4,000,000/yr.
Other expenses that seem to vary based on production levels $3,000,000/yr.
Other expenses that don't seem to vary $1,300,000/yr.
Selling price per unit $5,000/unit
Utilities:
This category is difficult to analyze; a part of it is related to the building's heat and light, whereas a part of it is used in the manufacturing process itself. You have the following data to which you will apply the high-low method:
• When there is no production, utility costs are $20,000/month.
• When production levels reached 4,000 units/month, utility costs totaled $40,000/month.
You are planning for the future and working on a report based on data from last year's actual performance. You are going to use the breakeven formula to determine the business's breakeven point and to answer some important questions regarding your data.
Using only the data from last year's actual performance, write a report answering the following questions:
• Which of these 8 cost categories would be considered variable, and why?
• Which of these 8 cost categories would be considered fixed, and why?
• Which costs would be considered mixed (i.e., semivariable or semifixed)?
• Ignoring utility costs altogether, what is the contribution margin per unit, in dollars and in percentage?
• Ignoring utility costs altogether, what is the breakeven level of sales?
• Ignoring utility costs altogether, if instead of breaking even, the firm wants to make $10,000/month profit, answer the following:
o How many units must be sold each month?
o To how many sales dollars is this unit volume equivalent?
• In year 2, the chief executive officer (CEO) plans to add $300,000/year of expense in added administrative salaried head count. Ignoring utility costs altogether, how many additional units must be sold just to pay for this added expense?
• Utilities: How many dollars of the utility bill are fixed? What is the variable cost per unit of utilities?
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