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ACCA Applied Knowledge · Management Accounting · Alternative cost accounting principles

Dorne Co is launching a product. Market research shows 8,000 units can be sold over its life at $60 per unit. The required lifetime profit is 25% of sales revenue. Design and development costs of $48,000 and end-of-life costs of $12,000 are fixed. The variable cost per unit is expected to be $25. What is the maximum lifetime variable cost cost gap per unit, ie the amount by which variable cost must fall (positive) or may rise (negative) to hit the target?

Allowable variable cost is $37.50 per unit, so the product has headroom rather than a gap. The listed options do not capture this precisely.

  1. A$2.50 reduction neededCorrect
  2. B$5.00 reduction needed
  3. C$2.50 increase allowed
  4. D$7.50 reduction needed

Explanation

Revenue = 8,000 x 60 = $480,000. Required profit = $120,000, so total allowable cost = $360,000. Less fixed costs $60,000 leaves $300,000 for variable costs, or $37.50 per unit. Estimated variable cost is $25, so costs are below the allowable level by $12.50 per unit, meaning an increase would be allowed. None of the options match, so the stated answer is flagged: the correct figure is a $12.50 increase allowed.

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