Question

Socks unlimited produces sport socks. the company has fixed expenses of $ 85 comma 000 and variable expenses of $ 1.20 per package. each package sells for $ 2.00. the number of packages socks unlimited needed to sell to earn an $ 22 comma 000 operating income was 133 comma 750 packages. if socks unlimited can decrease its variable costs to $ 1.00 per package by increasing its fixed costs to $ 100 comma 000​, how many packages will it have to sell to generate $ 22 comma 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

Answer 1

Answer:

Contribution margin per unit = Sales price per unit – Variable cost per unit

$2 - $1.20=$0.80

The contribution margin per package is $ 0.80.

Breakeven sales in units = Fixed expenses + Operating income ) / Contribution margin per unit $85,000 + $22,000/0.80 = 133,750 packages

Contribution margin per package = $2 - $1.00 = $1.00

Breakeven sales in units = Fixed expenses + Operating income ) / Contribution margin per unit

$100,000 + $22,000/$1= 122,000 packages

The firm will have to sell 122,000 packages to generate $22,000 of operating income. Socks unlimited would have to sell 11,750 less packages of socks to earn $22,000 of operating income. The increase in fixed costs was completely offset by the decrease in variable costs at the prior target profit volume of sales. Therefore, the firm will need to sell less units in order to achieve its target profit level.