Cost Analysis In addition to its Australian business, BRB is considering manufac
ID: 2791329 • Letter: C
Question
Cost Analysis
In addition to its Australian business, BRB is considering manufacturing a new range of cheaper bicycles in Indonesia. The following information is available.
-The Indonesian plant has capacity to manufacture 8000 units.
-Big Red Bicycle’s strategic goal is to generate a pre-tax profit of $1,000,000 for the next financial year for Indonesian operations
-Clients will pay a maximum of $500 per bicycle
-It is possibility to move to an Indian plant with a capacity for 10,000 units.
-The market for bicycles is growing rapidly and BRB will be able to sell everything produced.
-There is limited ability to renegotiate costs with suppliers
-Pricing and cost information is as follows.
Bicycle price per unit - (ex GST)
$500
Current variable costs per unit
$250
Fixed costs
$1,280,000
Answer the following.
How many units at the current variable cost would need to be produced to achieve profit target?
What do the variable costs per unit need to be to achieve the profit target at the current manufacturing capacity?
Would you recommend that the company move its manufacturing plant to India? Explain your position.
Bicycle price per unit - (ex GST)
$500
Current variable costs per unit
$250
Fixed costs
$1,280,000
Explanation / Answer
To produce pre-tax profits of 1000000$ million.
Contribution should be 1280000+1000000= 2280000$
Contribution per unit= (500-250) 250$
Required units to achieve targeted profit would be= 2280000/250= 9120 units.
At current manufacturing capacity of 8000
Variable cost per unit would be
Contribution per unit required= 2280000/8000= 285$
Sales price = 500$
So the variable cost needs to be= 500- 285= 215$ per unit.
3. Yes as explained in the question whatever the company produced is sold and 9120 units company achieve its targeted profits, so it will be profitable for them to shift to Indian operations and earn more profits at same variable and fixed costs.