) Calculate the number of handbags that must be sold for the company to make an annual profit of £80,000.

Question

Elite Accessories Ltd. is planning to sell 4,000 handbags next year at a selling

price of £85.  To make each handbag, the company uses 0.6m² of leather at a cost of £40 per m², two hours of direct labour at £8 per hour and £5 of variable overheads. Fixed costs are estimated to be £100,000 for the year. 

Answer 1

Hello, Hi,

Let's first calculate the full cost for making each bag. Sorry - I used $ since I don't have easy access to the pound sign.

The leather cost per bag is 0.6m^2 * $40/m^2, or $24. Overhead and labor, per bag, are calculated and all added to get a variable cost per bag:

We have fixed overhead of $100,000 and wish to make a profit of $80,000. We'll set X, the number of bags, times the price per bag equal to the total cost of manufacturing the bags and add the fixed costs and profit target:

85X = 45X + 100000 + 80000

40X = 180000

X = 4500 handbags to break even.