Question

Pure Water Products produces a water filter that attaches to the faucet and
cleans all water that passes through the faucet. During 2019, 38,000 units
of the water filter were sold to customers. Information related to the water
filter product appears below:

Contribution margin ..............  $28.30 per unit
Variable costs ...................  $43.20 per unit
Fixed costs (in total) ...........  $833,220

For 2020, Pure Water is considering buying new production equipment. The
new equipment will increase fixed costs by $33,085 per year and will
decrease the variable cost of the water filter by $2.75 per unit.

Assume the new production equipment is purchased. Calculate the number of
units of the water filter that Pure Water Products needs to sell in 2020
in order to earn the same net income that was earned in 2019.

Answer 1

New variable cost per unit = 43.20 - 2.75 = 40.45

New fixed cost = 833,220 + 33,085 = 866,305

New contribution margin = selling price - variable cost

= 71.5 - 40.45

= 31.05

Units to be sold = fixed cost + targeted income / contribution margin

= 866,305 + 242,180 / 31.05

= 35,700 units should be sold to earn net income as earned in 2019