Question

Blue Spruce Company had $152,600 of net income in 2016 when the selling price per unit was $153, the variable costs per unit were $93, and the fixed costs were $573,300. Management expects per unit data and total fixed costs to remain the same in 2017. The president of Blue Spruce Company is under pressure from stockholders to increase net income by $61,700 in 2017. Assume that Blue Spruce Company sells the same number of units in 2017 as it did in 2016. What would the selling price have to be in order to reach the stockholders’ desired profit level? (Round answer to 2 decimal places, e.g. 12.25.)

Answer 1

Answer:

Total contribution margin   = Desired Net Income + Fixed Costs                                                        =    $152,600   + $573,300                                                       =   $725,900

Contribution margin per unit   = Sales per unit (-) Variable Cost per unit                                                               =    $153 (-) $93                                                               =     $60 per unit

Units Sales at Break Even in 2016 = Total contribution margin / Contribution margin per unit                                                                     =   $725,900 / $60                                                                     = 12,098 Units

Units Sold in 2017 = (Total contribution margin + Increase in net Income) / Contribution margin per unit                                       =   ( $725,900 + $61,700 ) / $60                                      = 13,127 Units

Break even      =       (Fixed cost + Desired profit)   / Contribution margin                            12,098           =        ( $152,600   + $573,300 + $61,700 ) / (Selling Price (X) (-) $93) (Selling Price (X) (-) $93) =       $787,600   / 12,098      Selling Price per unit     =       $65.10   + $93                                                     =      $158.10 per unit

Selling Price per unit = Selling Price per unit