Question

Q3. Happy feet buy hiking socks $6 a pair & sells them for $10. Management budgets monthly fixed costs of $ 10,000 for sales volumes between 0 and 12000 pairs. Requirements: (a). Use both the income statement approach and the short cut contribution margin approach to compute the company's monthly breakeven sales in units. (b). Compute the monthly sales level (in units) required to earn a target operating income of $6000. Use either the income statement approach or the shortcut contribution margin approach.

Answer 1

a)

Selling price per unit = $10

Variable cost per unit = $6

Fixed cost = $10,000

Contribution margin per unit = Selling price per unit – Variable cost per unit

= 10 - 6

= $4

Break even point (units) = Fixed cost/Contribution margin per unit

= 10,000/4

= 2,500

At the break even level, profit earned is zero.

Let the break even occurs at K units

Profit = Sales -Variable costs - Fixed costs

0 = 10K - 6K - 10,000

4K = 10,000

K = 2,500

b)

Target profit = $6,000

Units to be sold to get a target profit = (Fixed cost + Target profit)/Contribution margin per unit

= (10,000 + 6,000)/4

= 16,000/4

= 4,000

Monthly sales to earn target profit of $6,000 = 4,000 units

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