Question

The company wishes to increase its total dollar contribution margin by 65% in 2021. Determine by how much it will need to increase its sales if all other factors remain constant.

Montreal Seating Co., a manufacturer of chairs, had the following data for 2020: Sales 2,930 units Sales price $40 per unit Variable costs $28 per unit Fixed costs $27,000

Answer 1

Contribution margin = Sales price – Variable cost = 40 – 28 = 12

Total contribution margin = Contribution margin × Sales

                                                = 12 × 2,930

                                                = 35,160

Now, this is to be increased by 65% or 0.65.

Increased total contribution margin = Total contribution margin × (1 + increased rate)

                                                            = 35,160 × (1 + 0.65)

                                                            = 35,160 × 1.65

                                                            = 58,014

Let the increased sales is Q.

Now, by the use of total contribution margin formula,

Increased total contribution margin = Contribution margin × Sales

58,014 = 12 × Q

58,014 / 12 = Q

Q = 4,834.50

Need to increase sales by (4,834.50 – 2,930 =) 1,904.50 units (Answer)

Note: fixed cost is not relevant here.