ACCT 4: Cost of Operation Exercise
ACCT 4: Cost of Operation Exercise
The Toy Box Inc is planning to expand the sales of their product X toy to increase their profits. According to the current scenario, the relevant information is that the minimum level of the order is 100 units per order and the purchasing cost of one X toy is $12 each. The purchasing cost of $12 is a variable cost because it depends on the quantity of the order. Similarly, the selling price of the one X toy is $22. Therefore, the sale of one X toy is generating the gross profit of $10 on each sale. The other cost such as commission cost of $1 on a sale and the $2 cost of promoting other products are also variable costs. Therefore, the actual contribution per unit of X toy is $7. (Debare, 2010)
Part (A): Minimum profit of $5,000:
Calculation with fix cost of $600:
The Toy Box must sell 800 units of X toy to generate the profits of $5,000. According to the given data, the each sale of the X toy is generating the actual profit of $7, which is called a contribution per unit. The contribution per unit is the actual amount which is related to the profits of the business. Therefore, the sales of 800 X toys will generate the required profit of $5,000 for the Toy Box Inc. Moreover, the incremental fixed cost is an important element in the calculation of the total number of units required to be sold. The incremental fix cost is relevant to the future sales of the business because the additional cashier is hired to maximize the sales of X toy in the shop. Moreover, it is very important for the management to increase the order level of 100 units per order to 800 units per order. In case of 100 units per order, Toy Box will face extra carriage or delivery costs. In this case, the relevant expenses of the project will increase and the targeted sales of 800 units will not achieve the targeted profit of $5,000. Similarly, it is very important for the business to account for the holding costs of the 800 units. The holding cost is another relevant cost which can affect the plan of the management. Therefore, if there is any holding cost expense, such as security staff at night, then the holding cost must be incorporated. (Debare, 2010)
Part B: Break-even Point
The break-even analysis is one of the most important tools for the managerial or cost accountants to keep the business in the profitable position. The break-even point identifies the minimum level of activity required to keep the operations of the business at the profitable level. Therefore, in the current scenario, to maintain the profitability of the X toys project, the Toy Box Company can use the break-even analysis to make budget of actual sales level instead of planning the required profit because if the sales of the X toy decreases in the future, then the company will suffer losses. (Gallo, 2014)
The break-even point of the order of 100 X toys in units:
The formula of calculation X toys break-even point is (fix cost + required profit + tax expenses) /contribution per unit. However, in the case of X toy, there is not information on taxation.
If the management of the Toy Box incorporates the fixed cost of $600 then the break-even point in the terms of the units is 800 units. This means that the company must sell at least 800 units to sustain at the profitable position. If the sales of the business are lower than 800 units, then the company will face losses. Similarly, if the management ignores the incremental fixed cost of $600, the minimum level of sales must be 715 units to keep the business at the profitable level. (Gallo, 2014)
The break-even point for X toy in sales ($):
The formula is (fixed cost + required profits + tax expense) / Contribution margin per unit
Contribution margin per unit in the current scenario is ($7 / $22) = 32%.
According to the scenario, the company must generate the profit of $17,500 from the sales of X toy to maintain the minimum level of profits. Moreover, if the management ignores the fixed cost, then the break-even point in sales is $15,625. (Gallo, 2014)
References
Debare, I. (2010, December 15). How to Perform a Break-Even Analysis. Retrieved February 28,
2016, from http://www.inc.com/guides/2010/12/how-to-perform-a-break-even-analysis.html
Gallo, A. (2014, July 02). A Quick Guide to Breakeven Analysis. Retrieved February 28, 2016,
