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Question - ABC Company makes a product which has a variable production cost of $16 and a variable sales cost of $4 per unit. Fixed costs are $80,000 per annum (every year), the sales price per unit is $36, and the current volume of output and sales is 12,000 units.
Required -
(1) Calculate the breakeven point in units, the margin of safety, and the annual profit.
(2) The company is considering hiring an improved machine for production. The variable sales cost ($4 per unit) would remain unchanged. But it is expected that the variable production cost would fall to $12 per unit. Furthermore, a new fixed cost from annual hire of this machine would be $20,000, in addition to the current fixed costs ($80,000 per annum) Determine the number of units that must be produced and sold to achieve the same profit as is currently earned, if the machine is hired.
(3) Discuss the limitations of CVP analysis.
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