3F PLC manufactures an executive office chair, which has proved to be very popular in the ADDIS market. The management team is considering the company’s operating plan for the forthcoming year and has asked for your assistance in evaluating a number of scenarios. The budgeted selling price for each chair is Birr 200, the variable cost per unit is Birr 120 and the total expected fixed costs are Birr 8,000,000.
(i) Determine the breakeven point in units and sales revenue.
(ii) Determine the operating profit earned, if 200,000 chairs are sold in the forthcoming year.
(iii) If 200,000 chairs are sold in the forthcoming year, by what percentage could the variable costs per unit increase before the company would generate an operating loss.
(iv) The company has the option to produce a second product throughout the forthcoming year. This second product, a supreme office chair, would have a selling price of Birr 300 and variable costs per unit of Birr 140. It is expected that producing a second product would increase the total fixed costs of the business to Birr 12,000,000. It is planned that sales of the supreme chair will make up 35% of the mix of total sales.