Question

Cullen Corporation has provided the following contribution format income statement. All questions concern situations that are within the relevant range. $270,000 Sales (9,000 units) Variable expenses Contribution margin Fixed expenses Net operating income 189.000 81,000 77.400 $3,600 Required: a. Estimate how many units must be sold to achieve a target profit of $52,200. b. If sales increase to 9,500 units, what would be the estimated increase in net operating income? c. If the variable cost per unit increases by $7, fixed expenses increases by $4,500, and unit sales are 22,200 units, what would be the estimated net operating income?

Answer 1

Requirement a: 14,400 units

Calculations:

To get target profit in units = (Target profit + Fixed cost) ÷ Contribution margin per unit

= ($52,200 + $77,400) ÷ ($81,000 / 9000 units)

= $129,600 ÷ 9

= 14,400 units

Requirement b: $4,500

Calculations:

Sales (9,500 units x $30)	$ 285,000
Less: Variable expense [9,500 x $21]	$ 199,500
Contribution margin	$ 85,500
Less: Fixed expenses	$ 77,400
Net operating income-Estimated	$ 8,100
Net operating income-Current	($ 3,600)
Estimated increase in net operating income	$ 4,500

*Sales cost per unit = $270,000 ÷ 9000 units = $30

*Variable expense per unit cost = $189,000 ÷ 9000 units = $21

Requirement c: ($37,500)

Calculations:

Sales (22,200 units x $30)	$ 666,000
Less:Variable expense [22,200 x $28]	$ 621,600
Contribution margin	$ 44,400
Less:Fixed expenses [77400 + 4500]	$ 81,900
Net operating loss	($ 37,500)