Answer:
Profit if 5,000 units were produced $ $
Total sales (5,000 x $50) 250,000
Less:
Total cost:
Total variable cost (5,000 x $25) 125,000
Total fixed cost 63,000 188,000
Net profit 62,000
Desired profit = $15 x 5,000 units = $75,000
Difference in profit = Desired profit - Net profit
= $75,000 - $62,000
= $13,000
Reduction in total expenses = Difference in profit
Reduction in total expense = $13,000
New total expenses = $188,000 - $13,000 = $175,000
The company should reduce the total expenses by $13,000 in order to achieve the target cost per unit.
Explanation:
In this case, there is need to determine the net profit if 5,000 units were produced. Then, we will obtain difference in profit by deducting the net profit from the desired profit. The difference in profit represents reduction in cost. The new total expenses will be the original total cost less reduction in cost. The total variable cost is the aggregate of variable product cost and variable administrative cost while the total fixed cost is the sum of total fixed overhead and total fixed administrative overhead.
