Example of profit range

Example of profit range

There are two products which has maximum demand of 5000 unit and minimum demand of 3000 units and company has a fixed cost of 50,000.

	Product A	Product B
Sales	150	170
Variable Cost	80	80
Maximum demand	5000 unit	5000 unit
Minimum Demand	3000 unit	3000 unit

Calculate the profit possibilities for Sara and co.

Contribution

Sales	150	170
Variable Cost	80	80
Unit Contribution	70	90

Favorable Condition

	Unit contribution	Unit sold	Total Contribution
Product A	80	5000	40,000
Product	90	5000	45000
Total Contribution			85000
Fixed Cost			(50,000)
Profit			35,000

Favorable Condition

	Unit contribution	Unit sold	Total Contribution
Product A	80	3000	24,000
Product	90	3000	27,000
Total Contribution			51,000
Fixed Cost			(50,000)
Profit			1,000

Example of Desired Profit

Example of Desired Profit

This example explains how the desired profit level can be achieved. It is proven that break even level the contribution is equal to the fixed cost plus variable cost. Therefore to achieve a desired level of profit we must add the profit to the break even level and calculated new level of sales volume.

Sale price per unit	120
Direct Material	40
Worked Labour	15
Factory Overheads	15
Factory Fixed Cost	70,000
Desired profit	50,000

Calculate the sale volume to achieve a profit of 50,000?

Solution

Sale price		120
Variable cost	(40+15+15)	70
Unit Contribution	(120-70)	50
Sales volume	70,000+50,000/30	2,400 unit

Check

	unit	Rate
Sales	2400	120	288,000
Variable Cost	2400	70	168,000
Contribution			120,000
Fixed cost			(70,000)
Profit			50,000

Example of break even

Example of break even

Break even is a point where the organization is able to recover its fixed cost only and therefore this is no profit no loss situation. There are two methods of calculating the break even point i.e.

Unit contribution Method

In this method fixed cost is divided by the unit contribution. this formula give a break even in terms of volume units to be sold to achieve the break even and number of unit can be multiplied to find the break even point in term of amount.

Sale price per unit	100
Material unit	50
Labour	10
Overheads	10
Fixed asset	60,000
Calculate break even

Solution

Sale price		100
Variable cost	(50+10+10)	70
Unit Contribution	(100-70)	30
Break even Sales	60,000/30	2,000 unit

	unit	Rate
Sales	2000	100	200,000
Variable Cost	2000	70	140,000
Contribution			60,000
Fixed cost			(60,000)
Profit			0