Question

The Herald Company manufactures and sells a single product which sells for $50 per unit and has a contribution margin ratio of 30%. The company's monthly fixed expenses are $25,000.

Required:
1. If Herald desires a monthly target net operating income equal to 20% of sales dollars, sales in units will have to be _______.

Answer 1

sales in units will have to be 2777.78

Step-by-step explanation:

first of all we need to identify the break even of heral company the it will be easy to identify the units that must be sold to achieve target profit.

Step-1

Selling price 50

Variable Cost 70% (35)

Contribution Margin 30% 15

Break even is point where total cost is equal to total revenue

Step-2

In step-1 we have covered variable cost that is 70% now we will cover fix cost for break even

Break even units = fix cost / Contribution margin per unit

Break even units = 25000/15

Break even units = 1666.67

break even in $ = 1666.666667 *50 =83333.33

Step-3

We need to identify the total units that should be sold to achieve targeted profit

targeted income 20% *83333.33= 16666.67

Units that should be sold to achive targeted profit = 16666.67+25000/15

Units that should be sold to achive targeted profit = 2777.78

or

Units that should be sold to achive targeted profit = 16666.66667 /15

Units that should be sold to achive targeted profit = 1111.111111

Add units to be sold to cover fix cost = 1666.67+1111.11 = 2777.78