Question

Newton Company currently produces and sells 4,000 units of a product that has a contribution margin of S6 per unit. The company sells the product for a sales price of $20 per unit. Fixed costs are $18,000. The company is considering investing in new technology that would decrease the variable cost per unit to $8 per unit and double total fixed costs. The company expects the new technology to increase production and sales to 9,000 units of product. What sales price (per unit) would have to be charged to earm a $90,000 target profit?
A, $18
B. $8
C. $20
D. $22

Answer 1

Answer:

The correct answer is D. $22

Explanation:

• The initial situation is the following:

Data:

Marginal contribution = $ 6 / u

Production = 4,000 u

Sale price = $ 20 / u

Fixed cost = $ 18,000

Calculations:

Unit fixed cost = Fixed Cost / Production = $ 18,000 / 4,000 u = $ 4.5 / u

Unit variable cost = Sales price - Marginal income - Unit fixed cost = $ 20 / u - $ 6 / u - $ 4.5 / u = $ 9.5 / u

Variable cost = Unit variable cost * Production = $ 9.5 / u * 4,000 u = $ 38,000

Total cost = Fixed cost + Variable cost = $ 18,000 + $ 38,000 = $ 56,000

Income = Sale Price * Production = $ 20 / u * 4,000 u = $ 80,000

Profit = Income - Total cost = $ 80,000 - $ 56,000 = $ 24,000

• The final situation is the following:

Data:

Production = 9000 u

Unit variable cost = $ 8 / u

Fixed cost = $ 36,000

Profit = $ 90,000

Calculations:

Variable cost = Unit variable cost * Production = 8 $ / u * 9,000 u = $ 72,000

Total cost = Fixed cost - Variable cost = $ 36,000 + $ 72,000 = $ 108,000

Income = Total cost + Profit = $ 108,000 + $ 90,000 = $ 198,000

Fixed unit cost = Fixed cost / Production = $ 36,000 / 9,000 u =$ 4 / u

Sales price = Income / Production = $ 198,000 / 9,000 u =$ 22 / u

Adicional Calculus:

Marginal contribution = Sales price - (Fixed unit cost + Unit variable cost) = $ 22 /u - ($ 8 /u + $ 4 /u) = $ 10 / u

The sales price (per unit) would be $ 22.