Hurst Co. manufactures and sells a single product. Price and cost data regarding

Question

Hurst Co. manufactures and sells a single product. Price and cost data regarding this product are as follows: Selling price $40 per unit Variable manufacturing cost $20 per unit Variable selling and administrative expenses $6 per unit Fixed manufacturing overhead $208,000 per year Fixed selling and adminsitative expenses $324,000 per year. In the current year, the company sold 43,000 units. Due to competition, management will be forced to lower the selling price by 10% next year. How many units must be sold next year to earn the same income as was earned in the current year? A.50,000 units B.53,200 units C.58,800 units D.60,200 units

Explanation / Answer

Variable expenses per unit = $20 + $6 = $26
Total fixed expenses = $208,000 + $324,000 = $532,000

Last year's net operating income:
Sales ($40 * 43,000 units).............................$1,720,000
Variable Expenses ($26*43,000)......................$1,118,000
Contribution Margin....................................$602,000
Fixed Expenses.........................................$532,000
Net Operating Income (last Year)....................$70,000   

New selling price per unit = $40 - (10% x $40) = $36
New contribution margin per unit = $36 - $26 = $10
Sales to achieve target profit = ($532,000 + $70,000) / $10 = 60,200 units

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