Reference no: EM132950907

Question - ABC manufactures a specialist component used in aircraft engines. Due to growth in the world aviation market, they are considering buying a piece of machinery to increase their output.

Details are as follows:

Annual depreciation $10,000

Annual production capacity (normal) 750 units per year

Direct materials $10 per unit

Direct labour $20 per unit

Variable overhead $5 per unit

Selling price $100 per unit

a) What is the break-even quantity?

b) How many units must be produced and sold to generate a profit of $2,000?

c) Assuming 246 units can be sold and a 5% tax on profit, what sale price is required to generate an after tax profit of $3,000?

d) Calculate the expected:

i) Depreciation absorption rate per unit ($)

ii) Contribution margin per unit ($)

iii) Total contribution margin ($)

iv) Gross profit per unit ($)

v) Total gross profit ($)

e) Assume in year 3 the production volume was temporarily revised down to 650 units due a brief downturn in the global economy. A return to normal production levels was expected in year 4. Calculate: i) Depreciation absorption rate per unit ($) ii) Contribution margin per unit ($) iii) Gross profit per unit ($) iv) Any over/under allocated overhead ($).