Question

Need solution:

HSL Company produces rugs. The following cost information from last year is available:

Total fixed costs $ 43,200 Total variable costs $ 520,800 Units sold 6,200 units · Contribution margin ratio 30%

The company is considering a new, highly Automated machine to replace some of the labor force. In addition, the company will adjust the selling price to reflect the change in demand. Assume the following: Decrease in variable cost per unit by 3% Annual depreciation expense of the new machine $8,000 Contribution margin ratio increases to 40%

To achieve the same level of net income as last year, how many units of rugs the company must sell? (Round the answer to the nearest unit).

A. 4,256 units

B. 4,463 units

C. 6,002 units

D. 6,621 units

E. None of the above

Answer 1

Answer:

Correct answer is:

A. 4,256 units

Explanation:

Last year:

Total variable costs = $ 520,800

Units sold = 6,200 units

Contribution margin ratio = 30%

Variable cost as % of sales = 1 - 30% = 70%

Sale value = Total variable costs / Variable cost as % of sales = 520800 /70% = $744,000

Last year Net Income = Sale value - Variable cost - Fixed cost = 744000 - 520800 - 43200 = $180,000

Current year:

Decrease in variable cost per unit by 3%

Variable cost per unit = (520800 / 6200)* (1 - 3%) = $81.48

Contribution margin ratio increases to = 40%

Variable cost as % of sale price = 1 - 40% = 60%

Sales price = 81.48 / 60% =$135.80

Contribution per unit = 135.80 - 81.48 = $54.32

New fixed costs = Last year fixed costs + Annual depreciation expense of the new machine = 43200 + 8000 = $51,200

Units required be sold to achieve the same level of net income as last year = (51200 + 180000) / 54.32 = 4,256 units

Hence option A is correct and other options B, C, D and E are incorrect.