Question

Bingham Company manufactures and sells Product J. Results for last year's manufacture and sale of Product J are as follows:

Sales: 10,000 units at $160 each $1,600,000
Less costs:
Variable production costs 960,000
Sales commissions: 15% of sales 240,000
Salaries of line supervisors 195,000
Traceable fixed advertising expense 180,000
Fixed general factory overhead (allocated to
products on the basis of square feet occupied170,000
Total costs 1,745,000
Net loss ($145,000)
Bingham Company anticipates no change in the operating results for Product J in the foreseeable future if the product is produced. Bingham is re-examining all of its products and is trying to decide whether to discontinue the manufacture and sale of Product J. The company's total fixed factory overhead cost would not be affected by this decision.
Assume that discontinuing Product J would result in a $100,000 increase in the contribution margin of other product lines. How many units of Product J would have to be sold next year for the company to be as well off as if it just dropped Product J and enjoyed the increase in contribution margin from other products?
a. 15,500 units.
b. 11,875 units.
c. 16,125 units.
d. 2,500 units.

Answer 1

Bingham Company

c. 16,125 units.

Step-by-step explanation:

a) Data and Calculations:

Sales: 10,000 units at $160 each $1,600,000

Less costs:

Variable production costs 960,000

Sales commissions: 15% of sales 240,000

Salaries of line supervisors 195,000

Traceable fixed advertising expense 180,000

Fixed general factory overhead, allocated to

products on the basis of square feet occupied 170,000

Total costs 1,745,000

Net loss ($145,000)

Variable costs:

Variable production costs $960,000

Sales commissions: 15% of sales 240,000

Total variable costs = $1,200,000

Unit variable cost = $120 ($1,200,000/10,000)

Contribution per unit = $40 ($160 - $120)

Total fixed costs:

Salaries of line supervisors 195,000

Traceable fixed advertising expense 180,000

Fixed general factory overhead, allocated to

products on the basis of square feet occupied 170,000

Total fixed costs = $545,000

Target contribution 100,000

(Traceable fixed cost + Target contribution)/Contribution margin

= $645,000/$40

= 16,125