Vijay produces shelving units. The total variable production cost of each shelving unit is £27 and each shelving unit sells for £55. In addition to the variable production cost of each unit, a sales commission of £3 is paid to the sales staff for each shelving unit sold. Vijay allocates a fixed overhead of £10 to each shelving unit on the basis that normal annual production and sales of 21,000 shelving units are achieved. Vijay is looking to achieve a target profit of £360,000 for the next financial year. How many shelving units will Vijay need to sell in total to achieve a target profit of £360,000?

Question

Quizplus · Accepted Answer

To find the number of units needed to achieve the target profit, calculate the contribution margin per unit: Selling price (£55) - Variable cost (£27) - Sales commission (£3) = £25. Then, use the formula: (Fixed costs + Target profit) / Contribution margin per unit = (21,000 units * £10 + £360,000) / £25 = 22,800 units.

Vijay Produces Shelving Units