Tim\'s Company currently produces and sells 4,000 units of a product that has a

Question

Tim's Company currently produces and sells 4,000 units of a product that has a contribution margin of $6 per unit. The company sells the product for a sales price of $20 per unit. Fixed costs are $18,000. The company has recently invested in new technology and expects the variable cost per unit to fall to $8 per unit. The investment is expected to increase fixed costs by $15,000. Before the new investment was made, how many units had to be sold to breakeven? Company currently produces and sells 4,000 units of a product that has a contribution margin of $6 per unit. The company sells the product for a sales price of $20 per unit. Fixed costs are $18,000. The company is considering investing in new technology that would decrease the variable cost per unit to $8 per unit and double total fixed costs. The company expects the new technology to increase production and sales to 9,000 units of product. What sales price would have to be charged to earn a $90,000 target profit?

Explanation / Answer

1)Before the new investment was made:-

Contribution margin per unit = $6 per unit

Fixed Costs = $18,000

Break-even (Units) = Fixed Cost/Contribution margin per unit

= 18,000/6

= 3,000 units ..Option-D ...ANswer

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2)New Fixed Cost = 18,000*2 = $36,000

New variable Cost per unit = $8

Let sales price unit be "x"

Target Profit = $90,000

Target Contribution= Fixed Cost + Target Profit

= 36,000 + 90,000

= $126,000

..

Therefore,

Contribution = (Sales Price p.u - Variable Cost p.u.)*No of units Sold

126,000 = (x-8)*9000

x-8 = 14

x = 22

Therefore answer is Option-A:-$22 per unit

x =

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