Question

Sam has recently found out that prices from his manufacturer will be increasing the variable cost by $40 when it used to only be $80. Sam wants to determine if he can keep the selling price the same for customers by decreasing his fixed costs by $15,000. Currently Sam’s sales are $300,000 at $200 per unit, and his fixed costs are $95,000. If Sam makes his proposed changes, how many sales in units will he need to make to keep prices the same while earning the same profit?

A : 2,400B : 4,750C : 3,167D : 2,063

Answer 1

D : 2,063

Step-by-step explanation:

Current scenario:

Variable cost = $80

Total income = $300,000

Unit selling price = $200

Fixed costs = $95,000

Units sold = Total income/Unit selling price

Units sold = $300,000/$200 = 1,500

Profit (P) = Total income - (Units sold*Variable cost ) - Fixed costs

`P= 300,000 - (1,500*80) - 95,000\\P=85,000`

Scenario after the increase in variable cost:

Variable cost = $120

Unit selling price = $200

Fixed costs = $80,000

Profit = $85,000

Units Sold (u) = (Profit + Fixed costs)/(Unit selling price -Variable cost)

`U=(85,000+80,000)/(200-120) \\U=2,062.5`

Rounding it to the nearest whole unit, Sam will need to sell 2,063 units to keep prices the same while earning the same profit.