Question

C93, Inc. sells three products. Income statement information for the three products for the most recent year is given below: Product A Product B Product C Selling price per unit ..... $25 $20 $18 Costs: Variable costs ............ $140,000 $156,000 $ 72,000 Advertising ............... $ 23,800 $ 26,800 $ 20,500 Rent ...................... $ 12,400 $ 12,400 $ 12,400 Supervisor's salary ....... $ 31,700 $ 32,800 $ 34,300 Property taxes ............ $ 7,000 $ 3,000 $ 4,000 Units sold ................. 7,000 13,000 10,000 The rent is allocated to the three products equally and the property taxes are allocated based on the square footage each product uses in the factory. C93, Inc. is considering eliminating Product A. If Product A is eliminated, the space currently being used to produce Product A can be rented out for $17,300 per year. Calculate the number of units of Product A that would need to be sold next year in order for C93, Inc. to be economically indifferent between dropping and keeping Product A.

Answer 1

Answer:

14,560 units.

Explanation:

Variable costs for Product A = $140,000 / 7,000 units

Variable costs for Product A = $20

Avoidable costs for Product A:

Advertising                                   $23,800

Rent                                              $17,300

Supervisor's salary                       $31,700

Avoidable costs for Product A    $72,800

Contribution margin per unit = $25 - $20 = $5

Economically indifferent units = Avoidable costs for Product A/Contribution margin per unit

Economically indifferent units = $72,800 / $5

Economically indifferent units = 14,560 units

So therefore, the number of units of Product A that would need to be sold next year is 14,560 units.