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?
Show calculations

To answer the questions regarding the costs and calculations, we need to analyze each cost category and determine if it is considered variable, fixed, or mixed.

1. The variable costs are the costs that change in direct proportion to the level of production or sales. In this case, the costs that would be considered variable are:
- Direct materials: This cost varies with the number of units produced.

2. The fixed costs are the costs that remain constant regardless of the level of production or sales. In this case, the costs that would be considered fixed are:
- Building depreciation: This cost remains the same regardless of the production or sales level.
- Machine operators: The cost of machine operators is a fixed cost because it does not change with the level of production or sales.
- Management staff: The cost of management staff is a fixed cost and does not change.

3. The mixed costs are the costs that have both fixed and variable components. In this case, the costs that would be considered mixed are:
- Other expenses that seem to vary based on production levels: These expenses have both fixed and variable components.
- Other expenses that don't seem to vary: These expenses are considered fixed since they do not vary with the level of production or sales.

Now, let's calculate the contribution margin per unit, breakeven level of sales, and the number of units and sales dollars required to make a $10,000/month profit.

Ignoring utility costs altogether:

Contribution margin per unit:
Contribution margin is the selling price per unit minus the variable costs per unit. In this case, the variable cost per unit is the direct materials cost per unit.

Variable cost per unit = Total direct materials cost / Total units produced
Variable cost per unit = $4,000,000 / 4,000 units per month
Variable cost per unit = $1,000

Contribution margin per unit = Selling price per unit - Variable cost per unit
Contribution margin per unit = $5,000 - $1,000
Contribution margin per unit = $4,000

Breakeven level of sales:
Breakeven level of sales is the point at which total revenue equals total cost, resulting in zero profit.

Breakeven level of sales (in units) = Fixed costs / Contribution margin per unit
Breakeven level of sales (in units) = ($200,000 + $100,000 + $400,000 + $3,000,000 + $1,300,000) / $4,000
Breakeven level of sales (in units) = $5,000,000 / $4,000
Breakeven level of sales (in units) = 1,250 units per month

To make a $10,000/month profit:
Profit = (Selling price per unit - Variable cost per unit) * Number of units - Fixed costs

Number of units = (Profit + Fixed costs) / (Selling price per unit - Variable cost per unit)
Number of units = ($10,000 + $5,000,000) / ($5,000 - $1,000)
Number of units = $5,010,000 / $4,000
Number of units = 1,252.5 units per month (rounded up to 1,253 units per month)

Sales dollars = Selling price per unit * Number of units
Sales dollars = $5,000 * 1,253 units per month
Sales dollars = $6,265,000 per month

Adding $300,000/year of added administrative salaried head count in year 2:
To cover this added expense, we need to determine the number of additional units that must be sold.

Additional fixed costs = $300,000/year
Break-even level of sales with the added expense = ($5,000,000 + $300,000) / ($5,000 - $1,000)
Break-even level of sales with the added expense = $5,300,000 / $4,000
Break-even level of sales with the added expense = 1,325 units per month

Therefore, an additional 1,325 units must be sold to cover the added expense.

Utilities:
To determine the fixed and variable components of the utility costs, we will use the high-low method.

Total utility cost at low production level = $20,000/month
Total utility cost at high production level = $40,000/month
Number of units at low production level = 0 units
Number of units at high production level = 4,000 units/month

Variable cost per unit of utilities = (Total utility cost at high production level - Total utility cost at low production level) / (Number of units at high production level - Number of units at low production level)
Variable cost per unit of utilities = ($40,000 - $20,000) / (4,000 - 0)
Variable cost per unit of utilities = $20,000 / 4,000
Variable cost per unit of utilities = $5

Fixed cost of utilities = Total utility cost at low production level - (Variable cost per unit of utilities * Number of units at low production level)
Fixed cost of utilities = $20,000 - ($5 * 0)
Fixed cost of utilities = $20,000

In summary, to answer the questions:

- Variable costs: Direct materials is the only variable cost as it varies with the number of units produced.
- Fixed costs: Building depreciation, machine operators, and management staff are fixed costs as they do not change with the level of production or sales.
- Mixed costs: Other expenses that seem to vary based on production levels have both fixed and variable components.
- Contribution margin per unit: $4,000 (dollars) or 80% (percentage).
- Breakeven level of sales: 1,250 units per month.
- To make a $10,000/month profit, 1,253 units per month must be sold, equivalent to $6,265,000 in sales dollars.
- To cover the added administrative salaried head count expense of $300,000/year, an additional 1,325 units per month must be sold.
- The utilities have a fixed cost of $20,000 and a variable cost per unit of $5.