Question

HASF Corporation has fixed costs of 1,000,000 variable costs of 50 per units and a contribution margin ratio of 40% and no of units sold 20,000

Required:

1. Compute the following                                                                                  

• Units sales price and unit’s contribution margin for the above product
• The sales volume in units required for company to earn an operating income of 100,000
• The $ sales volume required for company to earn an operating income of 300,000

Answer 1

 

Calculation of Unit sales price

Unit Sales price = Variable cost per unit/ Variable cost ratio

                              = Variable cost per unit/ (1 – Contribution margin ratio)

                              = $ 50 per unit/ (1 -40%)

                               = $ 50 per unit/ 60%

                              = $ 83.33 (approximately).

Calculation of Unit Contribution margin

Unit Contribution margin = Selling price per unit – variable cost per unit

                                                = $ 83.33 per unit - $ 50 per unit

                                                = $ 33.33 per unit (Approximately)

Calculation of sales volume in units required to earn operating income of $ 100,000

Sales Volume in units to earn target operating income = (Total fixed costs + Target Operating Income)/ Contribution margin per unit

                                                                                          = ($ 1,000,000 + $ 100,000)/ $ 33.33 per unit

                                                                                          = 33,000 units

Therefore sales volume to earn operating income of $ 100,000 is 33,000 units.

Calculation of Dollar sales volume required to earn operating income of $ 300,000

Sales Volume in dollars to earn target operating income = (Total fixed costs + Target Operating Income)/ Contribution margin ratio

                                                                                          = ($ 1,000,000 + $ 300,000)/ 40%

                                                                                          = $ 3,250,000

Therefore sales volume to earn operating income of $ 300,000 is $ 3,250,000.

Answer 5-3)

Sno.	Sales	Variable costs	Contribution margin per unit	Fixed Costs	Operating Income	Units Sold
1	$200,000	$120,000	$20	$55,000	$25,000	4,000
2	$180,000	$105,000	$15	$45,000	$30,000	5,000
3	$600,000	$360,000	$30	$150,000	$90,000	8,000

Working Notes:

Case -1

Calculation of Fixed Costs:

Fixed Costs = Contribution margin – Operating Income

                      = (Number of units sold X Contribution margin per unit) – Operating Income

                      = (4,000 units X $ 20 per unit) - $ 25,000

                      = $ 80,000 - $ 25,000

                      = $ 55,000

Calculation of Sales:

Sales = Variable costs + Contribution margin

           = Variable Costs + (Number of units sold X Contribution margin per unit)

            = $ 120,000 + (4,000 units X $ 20 per unit)

           = $ 120,000 + $ 80,000

           = $ 200,000

Case -2

Calculation of Contribution margin per unit:

Contribution margin per unit = Total contribution margin/ number of units sold

                                                      = (Total fixed costs + Operating income)/ number of units sold

                                                      = ($ 45,000 + $ 30,000)/ 5,000 units

                                                      = $ 15 per unit

Calculation of variable costs:

Variable costs = Sales – Contribution margin

                          = Sales – (Fixed Costs + Operating Income)

                         = $ 180,000 – ($ 45,000 + $ 30,000)

                         = $ 105,000

Case -3

Calculation of variable costs:

Variable costs = Sales – Contribution margin

                          = Sales – (Fixed Costs + Operating Income)

                         = $ 600,000 – ($ 150,000 + $ 90,000)

                         = $ 360,000

Calculation of number of units sold:

Number of units sold = Total Contribution margin/ Contribution margin per unit

                                        = (Fixed Costs + Operating Income)/ Contribution margin per unit

                                        = ($ 150,000 +$ 90,000)/ $ 30 per unit

                                         = 8,000 units.