Question

You just been hired as the general manager of Green Company which is a distributor that has an exclusive franchise to sell a particular product SD. You gathered the following information about the last two years:

		2017	2018
	Units sold	200,000	160,000
	Sales revenue	$1,000,000	$800,000
	Less cost of goods sold	$700,000	$560,000
	Gross margin	$300,000	$240,000
	Less G& Adm. expenses	$210,000	$198,000
	Operating income	$     90,000	$ 42,000

           

Required:      

1. Use the provided information to find out how much of Green’s costs & expenses are variable & how much are fixed.(Hint: Use the high-low method)

2. Compute the Green's total contribution margin for year 2018.

3. How many units you need to sell in year 2019 if you want to achieve a target profit of $80,000.

Answer 1

a)Variable cost varies with output (it remains constant in per unit) whereas fixed cost remains constant and does not varies with output (remains constant in totality)

Cost of goods sold: Variable in nature (constant in per unit)

cost of goods sold per unit = [700000/200000] or [560000/160000] = $3.5per unit

G& Adm. expenses :Mixed cost neither constant in per unit nor in totality

variable cost per unit = change in cost /change per unit

                          = [210000-198000]/[200000-160000]

                           = 12000/40000

                           = $ .30 per unit

Fixed cost:

At	Total cost	-	variable cost	Fixed cost
200000 units	210000		.30*200000= 60000	150000
160000 units	198000		.30*160000= 48000	150000

	variable	Fixed
cost of goods sold	3.5	0
G& Adm. expenses	.30	150000
Total	$ 3.8 per unit	150000

b)

	2018
sales	800000
less:variable expense	3.8*160000= 608000
contribution margin	192000

c)

selling price per unit= 1000000/200000 = $ 5 per unit

contribution per unit =price-variable cost

                        = 5-3.8 = $ 1.2 per unit

Target unit sales =[Fixed cost+target profit]/contribution per unit

                    = [150000+80000]/1.2

                    = 230000/1.2

                    = 191667 units