Question

Question 1

ABC Corporation sells a single product for $50. Its management estimates the following revenues and costs for the year 2020:

Net sales		$525,000		Selling expenses—variable		$19,700
Direct materials		153,800		Selling expenses—fixed		18,100
Direct labour		59,900		Administrative expenses—variable		10,100
Manufacturing overhead—variable		19,000		Administrative expenses—fixed		9,200
Manufacturing overhead—fixed		18,000

Assume the price remains at $50 per unit and variable costs remain the same per unit, but fixed costs increase by 20% annually. Calculate the percentage increase in unit sales required to achieve the same level of annual profit calculated in part (b). (Round answer to 2 decimal places, e.g. 15.25%.)

Percent increase in unit sales

%

Answer 1

Percent increase in unit sales

3.45%

Calculations:

Income Statement (current)
Net sales		525,000
Direct materials	153,800
Direct labor	59,900
Manufacturing overhead—variable	19,000
Administrative expenses—variable	10,100
Selling expenses—variable	19,700
Total variable costs		262,500
Contribution margin		262,500
Fixed costs:
Manufacturing overhead—fixed	18,000
Administrative expenses—fixed	9,200
Selling expenses—fixed	18,100
Total fixed costs		45,300
Net income		217,200

Contribution margin percentage = Contribution margin ÷ Net sales = $262,500 ÷ $525,000 = 0.50 or 50%

New sales = New fixed costs + Required profit = [($45,300 x 120%) + $217,200 ] ÷ Contribution margin ratio = ($54,360 + $217,200) ÷ 50% = $271,560 ÷ 50% = $543,120

Number of units to be sold to get same level of annual profit = $543,120 ÷ $50 = 10,862.4 units

Percent increase in unit sales =( New units sales - Current unit sales) ÷ Current unit sales = [10,862.4 - ($525,000/$50)] = (10,862.4-10,500) ÷ 10,500 = 362.4 ÷ 10,500 = 0.0345 = 3.45%