Question

7. Choco Heaven had a net loss of $100,000 in 2011 when the selling price per unit was $15, the variable costs per unit were $10, and the fixed costs were $200,000. Management expects per unit data and total fixed costs to be the same in 2012. Management has set a goal of earning net income of $50,000 in 2012. Choco Heaven is operating at 50% of capacity. Instructions A. How many units did Choco Heaven sell in 2011? B. How many units will Choco Heaven need to sell in 2012 to reach its goal of $50,000? c. How feasible is it that Choco Heaven might achieve its goal?

Answer 1

Solution a:

Contribution margin per unit = $15 - $10 = $5 per unit

Fixed costs = $200,000

Net loss in 2011 = $100,000

Contribution margin earned in 2011 = $200,000 - $100,000 = $100,000

Nos of units sold in 2011 = Contribution margin / CM per unit = $100,000 / $5 = 20000 units

Solution b:

Nos of units to be sold to earn target profit = (Fixed cost + target profit) / CM per unit = ($200,000 + $50,000) / $5 = 50000 units

Solution c:

At 50% capacity, company is producing 20000 units.

Total capacity of the company = 20000 / 50% = 40000 units

It means it is not feasible for Choco to achieve its goal.