Question

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Crane Company had $290,600 of net income in 2019 when the selling price per unit was...

Crane Company had $290,600 of net income in 2019 when the selling price per unit was $154, the variable costs per unit were $94, and the fixed costs were $573,400. Management expects per unit data and total fixed costs to remain the same in 2020. The president of Crane Company is under pressure from stockholders to increase net income by $57,600 in 2020.

A. Compute the number of units sold in 2019

B. Compute the number of units that would have to be sold in 2020 to reach the stockholders' desired profit level.

C. Assume that Crane Company sells the same number of units in 2020 as it did in 2019. What would the selling price have to be in order to reach the stockholders' desired profit level?

Solutions

Expert Solution

Answer A)

Calculation of number of units sold in the year 2019

Number of units sold = (Fixed cost + Target profit)/ Contribution margin per unit

                                        = ($ 573,400 + $ 290,600)/ $ 60

                                        = 14,400 units

Therefore the company sold 14,400 units in the year 2019

Working Note:

Calculation of Contribution margin per unit

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

                                                      = $ 154 - $ 94

                                                      = $ 60

Therefore contribution margin in the year 2019 was $ 60.00 per unit

Answer B)

Calculation of number of units to be sold in the year 2020 to achieve desired profit

Number of units to be sold = (Fixed cost + Target profit)/ Contribution margin per unit

                                                  = ($ 573,400 + $ 348,200)/ $ 60

                                                  = 15,360 units

Therefore the company must sell 15,360 units in order to increase its profit by $ 57,600 in the year 2020.

Working Note:

Calculation of Target profit for the year 2020

Target Profit for the year 2020 = Existing profit for the year 2019 + Increase in Profit in the year 2020

                                                         = $ 290,600 + $ 57,600

                                                         = $ 348,200

Therefore target profit for the year 2020 is $ 348,200

Answer C)

Calculation of selling price for the year 2020 in order to achieve desired profit with existing sales level of the year 2019

Number of units to be sold = (Fixed cost + Target profit)/ Contribution margin per unit

Number of units to be sold = (Fixed cost + Target profit)/ (Selling Price per unit – variable cost per unit)

                                     14,400 = ($ 573,400 + $ 348,200)/ (Selling price per unit - $ 94)

(Selling price per unit - $ 94) = $ 921,600/14,400

(Selling price per unit - $ 94) = $ 64

             Selling price per unit = $ 64 + $ 94

             Selling price per unit = $ 158

Therefore the company must sell 14,400 units (i.e. number of units sold in the year 2019) at a selling price of $ 158.00 per unit in order to achieve desired profit level of $ 348,200 in the year 2020.

Working Note:

Calculation of Target profit for the year 2020

Target Profit for the year 2020 = Existing profit for the year 2019 + Increase in Profit in the year 2020

                                                         = $ 290,600 + $ 57,600

                                                         = $ 348,200

Therefore target profit for the year 2020 is $ 348,200

ekkarill92 answered 1 year ago
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