Southend Ltd manufactures wheelie bins, each of which sells for £65.50. Variable labour costs of manufacture are £7.50 and variable raw materials costs are £6.25 per bin. Fixed costs for the 20X1 financial year are budgeted at £342000 and the directors have set a target profit figure for the year of £150000. How many wheelie bins must the company sell in 20X1 in order to reach the target profit (to the nearest whole unit)?
A) 9875
B) 8768
C) 9507
D) 7887

Question

Quizplus · Accepted Answer

First, we need to calculate the total variable cost per bin: 
Variable cost per bin = variable labour cost + variable raw material cost 
Variable cost per bin = £7.50 + £6.25 
Variable cost per bin = £13.75

Next, we need to calculate the contribution margin per bin: 
Contribution margin per bin = selling price per bin - variable cost per bin 
Contribution margin per bin = £65.50 - £13.75 
Contribution margin per bin = £51.75

Then, we can calculate the breakeven point (in units) using the following formula: 
Breakeven point (units) = fixed costs ÷ contribution margin per unit 
Breakeven point (units) = £342,000 ÷ £51.75 
Breakeven point (units) = 6,609.76

Since we can't sell a fraction of a bin, we need to round up to the nearest whole unit, which gives us 6,610 units as the breakeven point.

To calculate the number of units needed to reach the target profit of £150,000, we can use the following formula: 
Target units = (fixed costs + target profit) ÷ contribution margin per unit 
Target units = (£342,000 + £150,000) ÷ £51.75 
Target units = 9,507.25

Again, rounding up to the nearest whole unit, we get 9,508 units as the answer. Therefore, the best choice is C.

Southend Ltd Manufactures Wheelie Bins, Each of Which Sells for £65.50