Happy Feet produces socks. The company has fixed expenses of $80,000 and variabl
ID: 2469968 • Letter: H
Question
Happy Feet produces socks. The company has fixed expenses of $80,000 and variable expenses of $0.80 per package. Each package sells for $1.60. The number of packages Happy Feet needed to sell to earn a $29,000 operating income was 136,250 packages. If Happy Feet decreases its variable costs to $0.70 per package by increasing its fixed costs to $95,000, 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. | Sales in units (Round your answer up to the nearest whole unit.) Happy Feet will have to sellpackages to generate $29,000 of operating incomeExplanation / Answer
PART 1 THE FORMULA WILL BE AS FOLLOW
( FIXED EXPENSES + OPERATING INCOME) / CONTRIBUTION MARGIN PER UNIT = SALES IN UNITS.
USING THE FORMULA = (95000 + 29000) / ( 1.8 - 0.7) = 124000 / 0.9 = 137778 UNITS.
HAPPY FEET WILL HAVE TO SELL 137778 PACKAGES TO GENERATE $29000 OF OPERATING INCOME.
PART 2
HAPPY FEET WILL HAVE TO SELL 137778 PACKAGES TO GENERATE $29000 OF OPERATING INCOME.
HAPPY FEET WOULD HAVE TO SELL 1528 MORE PACKAGES OF SOCKS TO EARN $29000 OF OPERATING INCOME. THE INCREASE IN FIXED COST WAS NOT COMPLETELY OFFSET BY THE DECREASE IN VARIABLE COST AT THE PRIOR TARGET PROFIT VOLUME OF SALES. THERE FORE HAPPY FEET WILL NEED TO SELL MORE UNITS IN ORDER TO ACHIEVE ITS TARGET PROFIT LEVEL.
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