Question

Consider the following information for Cobalt Company:

Total fixed costs $150,000
Unit selling price $50


Cost Driver Data About Variables
Unit Variable Cost Level of Cost
Driver
Units sold $30 -
Setups 1,200 25
Engineering hours 40 1,100

Using the activity-based costing (ABC) equation, the units that must be sold to earn an operating income of $25,000 are ____________.

Answer 1

Using activity-based costing, to earn an operating income of $25,000, the Cobalt Company must sell 8,750 units, calculated by dividing the sum of total fixed costs and desired operating income by the contribution margin per unit.

Step-by-step explanation:

To calculate the number of units Cobalt Company must sell to earn an operating income of $25,000 using the activity-based costing (ABC) equation, we start by determining the total amount of money that must be covered by unit sales. This amount includes both total fixed costs and the desired operating income:

• Total Fixed Costs: $150,000
• Desired Operating Income: $25,000
• Total to be covered: $150,000 + $25,000 = $175,000

Next, we need to calculate the contribution margin per unit, which is the unit selling price minus the unit variable cost:

• Unit Selling Price: $50
• Unit Variable Cost: $30
• Contribution Margin per Unit: $50 - $30 = $20

To find out how many units must be sold to cover the total amount and earn the desired operating income, we divide the total amount by the contribution margin per unit:

• Units Sold = Total to be covered / Contribution Margin per Unit
• Units Sold = $175,000 / $20
• Units Sold = 8,750 units

Therefore, the Cobalt Company must sell 8,750 units to achieve an operating income of $25,000.