Question

Ten Toes produces sport socks. The company has fixed expenses of $75,000 and variable expenses of $0.75 per package. Each package sells for $1.50. The number of packages Ten Toes needed to sell to earn a $29,000 operating income was 138,667 packages (rounded). If Ten Toes can decrease its variable costs to $0.55 per package by increasing its fixed costs to $90,000, how many packages will it have to sell to generate $29,000 of operating income? Is this more or less than before? Why? Begin by identifying the formula to compute the sales in units at various levels of operating income using the contribution margin approach. ( Fixed expenses + Operating income / Contribution margin per unit = Sales in units (Round your answer up to the nearest whole unit.) Ten Toes will have to sell packages to generate $29,000 of operating income.

Answer 1

(Fixed expenses+Operating income) /Contribution margin per unit=Sales in units
Fixed expenses	90000
Add: Operating income	29000
Required Contribution margin	119000
Divide by Contribution margin per unit	0.95	=1.50-0.55
Sales in units	125263
Ten toes will have to sell 125263 packages to generate $29,000 of operating income

Fewer units to be sold = 138667-125263 = 13404

Ten toes would have to sell 13404 fewer packages to earn $29,000 of operating income.

The increase in fixed costs was completely offset by decrease in variable costs and thus will sell fewer units to achieve target profit level