Question

Oriole Company had $234,200 of net income in 2019 when the selling price per unit was $151, the variable costs per unit were $91, and the fixed costs were $575,800. Management expects per unit data and total fixed costs to remain the same in 2020. The president of Oriole Company is under pressure from stockholders to increase net income by $67,500 in 2020.a) Compute the number of units sold in 2019.b) compute the number of units that would have to be sold in 2020 to reach the stockholders' desired profit level.c) Assume that naylor company sells the same number of units in 2020 as it did in 2019. What would the selling price have to be in order to reacch the stockholders' desired profit level?

Answer 1

Answer:

A) 13,500 units

B) 14,630 units

C) $156 is the selling price.

Explanation:

A) Number of units sold = Total sales/selling price per unit

Given,

Operating profit (Net income) = $234,200

Selling price per unit = $151

Variable cost per unit = $91

Contribution margin per unit = $(151-91) = $60

With the help of contribution approach, we can find the total sales.

                                             Per Unit            Total Cost

Selling price                            $151

Less: Variable cost                   91        

Contribution Margin(1)            $60                  $810,000

Less: Fixed cost                                              $575,800

Net Income                                                      $234,200

Note: 1) Contribution Margin - Fixed cost = Net income

Contribution Margin = Net income + fixed cost

Contribution Margin = $234,200 + 575,800

Contribution Margin = $810,000

Total number of units = Contribution Margin/Contribution margin per unit

Total number of units sold = $810,000/$60

Total number of units sold = 13,500 units

B) We know,

Desired sales unit = $\frac{Fixed cost + Target profit}{Selling price per unit - Variable cost per unit}$

Given, as the selling price, variable cost and fixed cost remain same in 2020. Therefore,

Selling price per unit = $151

Variable cost per unit = $91

Fixed cost = $575,800

Targeted profit = $67,500 + 234,500 = $302,000

Therefore, desired sales unit = $\frac{575,800 + 302,000}{151 - 91}$

Desired sales unit = 14,630 units need to be sold in 2020.

C) If the company wants to sell 13,500 units but wants to achieve $(234,200+67,500) = $302,000 amount of profit, the company has to increase its selling price. Because the company cannot change the fixed cost.

Therefore,

Contribution Margin - Fixed cost = Net income

or, Contribution Margin = Net income + fixed cost

or, Contribution Margin = $302,000 + 575,800 = $877,800

Therefore, contribution margin per unit = $\frac{877,800}{13,500}$

Contribution margin per unit = $65

As the variable cost will not be changed, the selling price should be -

Selling price - variable expense per unit = Contribution margin per unit

Selling price = Contribution margin per unit + variable expense per unit

Selling price/unit = $65 + $91 = $156