Anthony Herrera, president of Retro Recreation Products, Inc., is concerned abou

Question

Anthony Herrera, president of Retro Recreation Products, Inc., is concerned about declines that he is beginning to see in the demand for the company’s line of old school logo basketballs as new competitors enter the market. At a current contribution margin of $10, the company must sell 80,500 basketballs to generate the desired $210,000 in annual operating income. Based on a recent market research report, Anthony thinks the company can expect annual sales of only 57,500 basketballs in the future.

If Anthony wants to maintain the current level of operating income in the future while selling only 57,500 basketballs, what contribution margin must the basketballs generate?

Explanation / Answer

With the

current contribution Margin $10* 80,500= $805,000

Profit Or Operating income =$210,000

Therefore the Fixed cost= $805,000-$210,000 =$595,000

To manitain current level of perating margine by selling 57500 unit will be = 80,500/57,500*10= $14

Therefore the Contribution per unit will be= $14

checking the answer

Total contribution (57500*14)   = $805,000

Less fixed cost                                  595,000

Net income                                     $210,000

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