Question

suppose 4,900 units were actually sold. Would it be possible for this company to achieve its Target Operating Profit of $108,000 (assuming fixed costs were $72,000). If so, why and what would have had to happen?

i need this qnswerplease wiith in 1 hour

Answer 1

Solution

Actual number of units sold 4,900

Target operating income         $108,000

Fixed expenses                        $72,000

The company can achieve the target operating income of $108,000 if the contribution margin per unit sold is as follows,

Desired units sold = (target income + fixed expenses)/contribution margin per unit

4,900 = ($108,000 + $72,000)/Contribution margin per unit

4,900 = $180,000/contribution margin per unit

Hence, the desired contribution margin per unit = $180,000/4,900 = $36.73

Hence, the company can earn the target operating income of $108,000 at fixed expenses of $72,000 if it earns a contribution margin per unit of $36.73 and sells 4,900 units.

Explanation:

As per the cost-volume-profit equation,

Sales – variable cost = contribution margin

Contribution margin – fixed expenses = net operating income

Contribution margin = fixed expenses + net operating income

So, to earn a target income, the company needs to establish its desired contribution margin.

Desired contribution margin = desired sales x contribution margin per unit

Contribution margin per unit = sales price per unit – variable cost per unit