Question

A company sold a total of 1,000 units for total sales revenue of $70,000.

The company incurred total variable expenses of $38,500 and total fixed expenses of $ 23,310.

Based on this, the company reported a total contribution margin of $31,500 and net operating income of $ 8,190.

Use this information to answer the following questions. Assume that all units are within the relevant range.

1 Calculate the net operating income if the variable cost per unit increases by $1, spending on fixed costs increases by $1,600, and unit sales increase by 220 units.

2 Calculate the break-even point in unit sales.

3 Calculate the break-even point in unit sales.

4 Calculate the number of units that must be sold to earn a target profit of $18,900.

Answer 1

Sales price per unit = $70,000 / 1,000 = $70

Variable expenses per unit = $38,500 / 1,000 = $38.5

1. Sales = 1,000 + 220 = 1,220 units

Variable expenses per unit = $38.5 + $1 = $39.5

Fixed expenses = $23,310 + $1,600 = $24,910

Net operating income = Sales - Variable costs - Fixed costs

= (1,220 * $70) - (1,220 * $39.5) - $24,910

= $12,300

2. Contribution margin per unit = Selling price per unit - Variable expenses per unit

= $70 - $38.5

= $31.5

Break-even point in unit sales = Fixed expenses / Contribution margin per unit

= $23,310 / $31.5

= 740 units

3. Contribution margin per unit = Selling price per unit - Variable expenses per unit

= $70 - $38.5

= $31.5

Break-even point in unit sales = Fixed expenses / Contribution margin per unit

= $23,310 / $31.5

= 740 units

4. Units to be sold = (Fixed expenses + Desired profit) / Contribution margin per unit

= ($23,310 + $18,900) / $31.5

= 1,340 units