Option A | Option B | Formulas | |||
1 | a. | Fixed Costs | $1,200,000 | $4,500,000 | |
b. | Contribution margin per unit | $15 | $40 | ||
c. | Breakeven point (a)/(b) | 80,000 | 112,500 | (Fixed cost/contribution per unit) | |
Units | Units | ||||
2 | a. | Operating income under option A required | $30,000 | ||
b. | Fixed Costs | $1,200,000 | |||
c. | Contribution per Unit | $15 | |||
d. | Required shipment units(a+b)/(c ) | 82,000 | (Target profit+fixed Cost)/Contribution per unit | ||
3 | Let X unit of shipment is required to produce margin of 9% on sales | ||||
Total Sale Value | 100 X | ||||
Variable Cost | 85 X | ||||
Total Contribution | 15 X | ||||
Fixed Cost | $1,200,000 | ||||
Operating Income | (15 X - 1,200,000) | ||||
and also, Operating income = 100 X * 9% = 9 X | |||||
hence, | |||||
9 X = 15 X - 1,200,000 | |||||
X = 1,200,000/6 | |||||
X = 200,000 | |||||
hence, 200,000 units of shipment required of Option A to produce 9% of sales revenue | |||||
4 | Net income required | $180,000 | |||
Tax rate | 40% | ||||
Operating Income | $300,000 | 180,000/(1-.4) | |||
Add: fixed Cost | $4,500,000 | ||||
Total contribution required | $4,800,000 | ||||
Contribution per unit | $40 | ||||
Units required to be sold | 120,000 | (4800,000/40) |
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