Question

Finch Company produces a product that has a variable cost of $27 per unit and a sales price of $62 per unit. The company’s annual fixed costs total $780,000. It had net income of $340,000 in the previous year. In an effort to increase the company’s market share, management is considering lowering the selling price to $52 per unit.

Required

If Finch desires to maintain net income of $340,000 how many additional units must it sell to justify the price decline?

Assume that in addition to lowering its selling price to $52, Finch also desires to increase its net income by $80,000. Determine the number of units the company must sell to earn the desired income.

If Finch desires to maintain net income of $340,000 how many additional units must it sell to justify the price decline?

	Additional units required units

Assume that in addition to lowering its selling price to $52, Finch also desires to increase its net income by $80,000. Determine the number of units the company must sell to earn the desired income.

	Number of units sold

Required

Answer 1

Variable cost per unit = 27

Sales price per unit = 62

Contribution margin per unit = Selling price per unit - Variable cost per unit

= 62 - 27

= 35

Fixed costs = 780,000

Net Income = 340,000

Number of units sold = (Net Income + Fixed costs) / Contribution margin per unit

= (340,000 + 780,000) / 35

= 32,000

Required

Variable cost per unit = 27

Sales price per unit = 52

Contribution margin per unit = Selling price per unit - Variable cost per unit

= 52 - 27

= 25

Fixed costs = 780,000

Desired net Income = 340,000

Number of units to be sold = (Desired net Income + Fixed costs) / Contribution margin per unit

= (340,000 + 780,000) / 25

= 44,800

Additional required units = 44,800 - 32,000 = 12,800

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Variable cost per unit = 27

Sales price per unit = 52

Contribution margin per unit = Selling price per unit - Variable cost per unit

= 52 - 27

= 25

Fixed costs = 780,000

Desired net Income = 340,000 + 80,000 = 420,000

Number of units to be sold = (Desired net Income + Fixed costs) / Contribution margin per unit

= (420,000 + 780,000) / 25

= 48,000

Number of units sold = 48,000