Assume that your R&D team has a new design for their product Able next round tha
ID: 378397 • Letter: A
Question
Assume that your R&D team has a new design for their product Able next round that can reduce their material cost of producing units from $8.59 to $7.73. They pass on half of all cost savings by cutting the current price to customers. For simplicity:
Use current labor cost of $8.37
Assume all period costs as reported on Andrews Income Statement for Asia Pacific (Annual Report Page 5) will remain the same.
Current price is equivalent to $30.00
Shipping cost to Asia Pacific is $2.50 per unit
Determine how many units (000's) of product Able would need to be sold in Asia Pacific alone next round to break even on the product.
Explanation / Answer
Cost saving = 8.59 - 7.73 = 0.86. Half of this is passed to customers, therefore, reduction in price to customer = 0.86/2 = 0.43
Current price = 30
New price = 30-0.46 = 29.57
Total variable cost per unit = material cost + labor cost = 7.73 + 8.37 = 16.1
Breakeven units = Fixed cost / (selling price - variable cost ) = 8578 / 29.57 - 16.1) = 636.82 ('000 units)