Question

SALES PRICt/UNIT VAR COST/UNIT FIXED COST 100 1,000,000 How MANY UNITS HAVE TO BE SOLD IN ORDER FOR NIBT TO 50% OF GROSS PROFI PRODUCTS PER UNIT SALES PRICE PER UNIT VARIABLE COST PER UNIT GP PER UNIT FIXED COST PER UNIT NIBT 10 8 2 10 10 -2 WHICH PRODUCT OR PRODUCTS (IF ANY) NEEDS/ NEED TO BE REMOVED TO MAXIMIZE PROFIT (FIXED COST IS NOT ELIMINATED IF AN ITEM IS ELIMINATED)

Answer 1

Solution 1:

Selling price per unit = $100

Variable cost per unit = $50

Gross profit per unit = $100 - $50 = $50

Fixed cost = $1,000,000

Desired NIBT = 50% of Gross profit

Let desired gross profit = X

Desired NIBT = 50% of X = 0.50 X

now

X - $1,000,000 = $0.50 X

X= $2,000,000

Desired NIBT = $2,000,000*10% = $1,000,000

Nos of units to be sold for desired NIBT = (Fixed cost + NIBT) / Gross profit per unit = ($1,000,000 + $1,000,000) / $50

= 40000 units

Solution 2:

As fixed cost could eliminated on removal of products, therefore only those products to be removed which provides negative gross profit per unit.

Therefore only product B should be dropped.