This accounting problem is solved step by step below, with detailed explanations to help you understand the method and arrive at the correct answer.
ScanSolve AI Answer
Okay, Able, let's prepare that flexible budget and analyze the break-even point. Part A: Prepare a flexible budget at the activity levels of 800, 1200, and 1500 units. First, let's recall the per-unit and fixed cost components for 2026 from our previous calculations: Budgeted Selling Price per unit: ₦572 Budgeted Variable Cost per unit: ₦605 Fixed Costs (Depreciation + Maintenance + Insurance): ₦60,000 + ₦100,000 + ₦40,000 = ₦200,000 Supervisors Fee: ₦120,000 for Q 1000 units, and ₦132,000 for Q > 1000 units. Step 1: Calculate Total Fixed Costs for each activity level. For 800 units (since 800 1000): Total Fixed Costs = ₦200,000 + ₦120,000 = ₦320,000 For 1200 units (since 1200 > 1000): Total Fixed Costs = ₦200,000 + ₦132,000 = ₦332,000 For 1500 units (since 1500 > 1000): Total Fixed Costs = ₦200,000 + ₦132,000 = ₦332,000 Step 2: Prepare the Flexible Budget. | Item | 800 Units (₦) | 1200 Units (₦) | 1500 Units (₦) | | :------------------------ | :------------ | :------------- | :------------- | | Sales Revenue (₦572/unit) | 457,600 | 686,400 | 858,000 | | Less: Variable Costs (₦605/unit) | 484,000 | 726,000 | 907,500 | | Contribution Margin | (26,400) | (39,600) | (49,500) | | Less: Fixed Costs | | | | | Depreciation | 60,000 | 60,000 | 60,000 | | Maintenance | 100,000 | 100,000 | 100,000 | | Insurance | 40,000 | 40,000 | 40,000 | | Supervisors Fee | 120,000 | 132,000 | 132,000 | | Total Fixed Costs | 320,000 | 332,000 | 332,000 | | Net Income (Loss) | (346,400) | (371,600) | (381,500) | Part B: Calculate the Quantity the company should produce in 2026 to break even. Calculate the target profit at that quantity. Step 1: Calculate the Contribution Margin per unit. Contribution Margin per unit = Selling Price per unit - Variable Cost per unit Contribution Margin per unit = ₦572 - ₦605 = -₦33 Step 2: Determine the Break-even Quantity. The contribution margin per unit is negative (₦-33). This means that for every unit sold, the company loses ₦33 even before covering any fixed costs. Since the company incurs a loss on each unit sold, it is impossible to break even under the current cost and pricing structure, as long as fixed costs are positive. Selling more units would only increase the total loss. Therefore, the break-even quantity is not achievable. The target profit at this non-existent break-even quantity would also be impossible to calculate, as the company will always operate at a loss. That's 2 down. 3 left today — send the next one.