Question

Auto Group is a company that produces component parts for automobile engines. The total market demand for these component parts is 800 million units per year. With the fixed expenses of $98 million and average variable cost of $8 per unit, Auto Group has to sell its component parts at $16 per unit in order to achieve its target gross profit.

Determine the required volume (sales volume in units) if the company is targeting $38 million in operating income.

Answer 1

Therefore, Auto Group needs to sell 17 million units of component parts to achieve a target operating income of $38 million

Step-by-step explanation:

To determine the required volume (sales volume in units) for Auto Group to achieve a target operating income of $38 million, we need to calculate the contribution margin per unit.

Contribution margin per unit = Selling price per unit - Average variable cost per unit

Contribution margin per unit = $16 - $8 = $8

Next, we can calculate the number of units Auto Group needs to sell in order to achieve the target operating income:

Operating income = (Sales volume in units) × (Contribution margin per unit) - Fixed expenses

$38 million = (Sales volume in units) × $8 - $98 million

$38 million + $98 million = (Sales volume in units) × $8

$136 million = (Sales volume in units) × $8

Sales volume in units = $136 million / $8

Sales volume in units = 17 million units