Question

A total of 30,000 units were sold last year. The contribution margin per unit was $2 and fixed expenses totaled $20,000 for the year. This year fixed expenses are expected to increase to $26,000, but the contribution margin per unit will remain unchanged at $2. How many units must be sold this year to earn the same profit as earned last year?

Answer 1

It is given that, the contribution margin per unit will remain constant even though there is an increase in fixed cost.

We are not provided with the profits of any year.

But the fixed cost amount is provided. Previous year fixed cost = $ 20,000; Current year fixed cost = $ 26,000

There is an increase in fixed cost of $6,000.

Profit earned in the previous year:

No. of units sold = 30,000; Contribution per unit = $2

Total contribution earned in previous year = $2 x 30,000 = $ 60,000

Fixed cost in previous year = $20,000

Profit = $60,000 - $ 20,000 = $ 40,000

Required:

Profit = $ 40,000;

Fixed cost = $26,000.

Total Contribution = Fixed Cost + Profit

Total Contribution = $ 26,000 + $ 40,000

Total Contribution = $ 66,000

Contribution per unit = $2 (Given)

Therefore, no. of units sold = Total Contribution / Contribution per unit.

No. of units sold = $66,000/$2

No. of units sold = 33,000 units.

Therefore, 33,000 units must be sold this year to earn the same profit as earned last year.

Hope it is helpful!!