Cycle world has 2 models of bicycles they are considering for manufacturing. The relevant budgeted information about each model is as follows.

	Basic Model	Advance Model
Selling Price per unit	$200	$350
Variable manufacturing costs per unit	$245	$273
Variable selling and admin costs per unit	$45	$35

 

The fixed costs are budgeted as follows

Fixed manufacturing costs	$355,000
Fixed selling & admin costs	$45,000

 

Required: 

(a) Calculate the contribution margin ratio for bicycle model (basic and advance) and advise which model can provide a greater contribution margin to the business. Show all workings. 

(b) Based on previous sale records, 66% of the profit is from the Advance model, and the rest is from the Basic model. If the business aims to achieve a profit of $90,000, how many units of bicycles for each model would need to be sold to achieve the target profit? Use the contribution margin method and round your answer to the nearest whole unit. Show all workings.

(c) In the following year, the business is considering upgrading the factory machine. This would result in an increase in fixed costs of $36,000 but reduce the variable manufacturing costs per unit of the Basic Model by $20 per unit and the Advance Model by $25 per unit. Assuming the target profit and the proportion of profit generated by both models are the same as indicated in part (b), would you advise the managers to proceed with the investment? Ensure your answer is supported by calculations and a clear recommendation.  

Answer rating: 100% (QA)

a Contribution Margin Ratio for Basic Model Selling Price per unit 200 Variable manufacturing costs per unit 245 Variable selling and admin costs per ... View the full answer