Question

New Berlin Corporation has annual fixed costs of $800,000, variable costs of $48 per unit, and a contribution margin ratio of 40 percent.
a. Compute the unit sales price and unit contribution margin for the above product.

b. Compute the sales volume in units required for New Berlin Corporation to earn an operating income of $600,000.

c. Compute the dollar sales volume required for New Berlin Corporation to earn an operating income of $600,000.

Answer 1

Based on the variable costs and contribution margin, the unit sales price is $80 and the unit contribution margin is $32.

The sales volume in units needed to earn $600,000 is 43,750 units and the amount in dollar sales needed is $3,500,000.

What is the unit sales price and unit contribution margin?

The unit sales price can be found as:

= Variable cost / (1 - contribution margin ratio)

= 48 / (1 - 40%)

= $80

Unit contribution margin is:
= Selling price x Contribution margin ratio

= 80 x 40%
= $32

What is the sales volume required to earn $600,000?

In units, this amount is:
= (Fixed cost + income required) / Contribution margin

= (800,000 + 600,000) / 32

= 43,750 units

In dollar terms the amount needed is:

= Units needed x selling price

= 43,750 x 80

= $3,500,000

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