Question

Towing Company manufactures and sells a single product for $40 per unit.
Variable costs are $30 per unit and fixed costs total $168,000. During
2019, the company sold 26,500 units of this product to customers. In
order to improve profitability, the president of Towing Company believes
the following changes should be made in 2020:

1. decrease the selling price of the product by 10%

2. automate a portion of the production process which will reduce
   variable costs by 5% per unit but will add an additional fixed
   cost of $16,310 per year

3. increase advertising by $49,420

Assume these changes are made. 
A) Calculate the number of units that Towing Company must sell in 2020 in order to earn a net income that is 20% greater than the net income earned in 2019.

B) Calculate the number of units that Towing Company must sell in 2020 in order to earn a target profit equal to 12% of sales.

Answer 1

Computation of Net Income Earn in 2019
	Per Unit	Amount
Volume		26500
Sales	$40.00	$1,060,000.00
Less: Variable cost	$30.00	$795,000.00
Contribution	$10.00	$265,000.00
Less: Fixed cost		$168,000.00
Net Income		$97,000.00

Part-1 Computation No. of Unit

Revised Selling Price ( $40*0.90)=$36

Revised Variable Cost ( $30*0.95)= $28.50

Contribution per Unit = $36-28.50= $7.50

Revised Fixed Cost= $168000+$49420+16310= $233720

Target Income= 97000*1.20=$116400

Expected Contribution = Revised Fixed Cost+ Target Income

=$233730+$116400= $350130

No. of Unit to be sold = Expected Contribution/ Contribution per Unit

=$350130/$7.50= 46684 Unit

Part-2 Computation No. of Unit

Revised Selling Price ( $40*0.90)=$36

Revised Variable Cost ( $30*0.95)= $28.50

Contribution per Unit = $36-28.50= $7.50

Revised Fixed Cost= $168000+$49420+16310= $233720

Target Income= Sales X 12%=1060000*12%=$127200

Expected Contribution = Revised Fixed Cost+ Target Income

=$233730+$127200= $360930

No. of Unit to be sold = Expected Contribution/ Contribution per Unit

=$360930/$7.50= 48124 Unit