Question

Orange Inc. earns a unit contribution margin of $15 for each SwagWatch it sells and $30 unit contribution margin for each CopperPod. In 2017, the company made $500,000 of Pre-tax Income on sales of 5,000 SwagWatches and 20,000 CopperPods. In 2018, the company expects to sell 10% more units of each product. Their selling price and variable cost per unit will remain unchanged, but fixed costs will increase by 5%. How much Pre-tax Income would Orange expect in 2018?

Answer 1

Answer: $ 558,750

Explanation:

Contribution Margin (total) = Contribution Margin (SwagWatch) + Contribution Margin (CopperPod)

Contribution Margin  = selling price * variable cost per unit

selling price (SwagWatch) =  $15, variable cost (SwagWatch) =  5,000

selling price (CopperPod) =  $30, variable cost (CopperPod) =  20,000

In 2017

Contribution Margin (total) =$ (15 * 5,000) + (30 * 20,000) = $ 675,000

Fixed Costs = Contribution Margin (total) - Pre-tax Income

Fixed Costs = $ (675,000 – 500,000) = $ 175,000

In 2018

Fixed Costs increases by 5% ⇒ $ [175,000 x (1 + 0.05)]

Fixed Costs = $ 183,750

Sales increases by 10% for each product ⇒

Contribution Margin (total) = $Contribution Margin (total)_{2017}$ * (1 + 0.1)

Contribution Margin (total) = $ [675,000 x (1 + 0.1)]

Contribution Margin (total) = $ 742,500

Pre-tax Income = Contribution Margin (total) - Fixed Costs

Pre-tax Income = $ (742,500 - 183,750) = $ 558,750