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Question help 16.doc

Rum company has developed a new product that will be marketed for the first time
during the next fiscal year. It will cost Rum Company $75,000 for an advertising
campaign to market this new product next year. Although Rum’s Marketing Department
estimates that 35,000 units could be sold at $36 per unit, Rum’s management has
allocated only enough manufacturing capacity to produce a maximum of 25,000 unit of
the new product annually. This fixed overhead costs associated with the new product are
budgeted at $400,000 for the year. The direct materials cost for each unit are $10. It also
requires $4 in direct labour and $2 in variable overhead to produce on unit.
A. How many units of the new product must Rum sell during the net fiscal year in
order to break even on the product? B. What is the profit Rum would earn on the new product if all the manufacturing
capacity allocated by management is used and the product is sold for $36 per unit?
C. The Marketing Department would like more manufacturing capacity to be
devoted to the new product. What would be the percentage increase in net
income for the new product if its unit sales cold be expanded by 10% without
any increase in fixed expenses and without any change in the unit selling price or
unit variable cost? D. Rum’s management has stipulated that the new product must earn a profit of at
least $125, 000 in the next fiscal year. What unit selling price would achieve this
target profit if all of the manufacturing capacity allocated by management is used
and all of the output can be sold at that selling price?

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