Question

The Fisher Company will produce 50,000 10-gallon aquariums next year. Variable costs will equal 40% of dollar sales, while fixed costs total $100,000. At what price must each aquarium be sold for the firm's EBIT to be $90,000?

Answer 1

Answer:

sales price = $6.33

Explanation:

we will calculate the aquariums price based on the Break-even formula:

$\frac{Fixed\:Cost + Target \: Profit}{Contribution \:Margin} = Units\: to \: Profit_{units}$

100,000 + 90,000 = 190,000 total contribution from the aquariums

units to produce 50,000

$\frac{190,000}{Contribution \:Margin} = 50,000$

190,000/50,000 = contribution Margin

190,000 / 50,000 = 3.8 dollars

Each aquarium must provide a 3.8 dollar contribution

sales price - variable price = contribution margin

sales price - variable price = 3.8

we know that variable cost are 40% of sales price, so we replace on the formula for that expression:

sales price - 40% sales price = 3.8

now we solve:

1 sales price - 0.4 sales price = 3.8

0.6 sales price = 3.8

sales price = 3.8/0.6 = 6.33