Question

Sheridan Company had $247,500 of net income in 2019 when the selling price per unit was $156, the variable costs per unit were $96, and the fixed costs were $574,500. Management expects per unit data and total fixed costs to remain the same in 2020. The president of Sheridan Company is under pressure from stockholders to increase net income by $41,100 in 2020. (a) Compute the number of units sold in 2019. units (b) Compute the number of units that would have to be sold in 2020 to reach the stockholders’ desired profit level. units (c) Assume that Sheridan Company sells the same number of units in 2020 as it did in 2019. What would the selling price have to be in order to reach the stockholders’ desired profit level? New selling price $

Answer 1

(a) 13700 (b) 14385 (c) $159

Step-by-step explanation:

(a) Given the selling price, variable cost and fixed cost simulate a profit and loss statement. We know the net income is 247500, add the fixed cost of 574500 we get a marginal contribution of 822000. We know the selling price is 156, the variable cost is 96, therefore the marginal contribution per unit is 60. 822000/60 is 13700.

(b) Same principle as above adding back profit to fixed cost (247500+41100) + 574500 = 863100 which is our new marginal contribution. 863100/60 is 14385.

(c) We know the marginal contribution to achieve a net income of 288600 is 863100 given the fixed cost remaining the same. 863100/13700 = 63 which is the marginal contribution per unit. If the marginal contribution per unit goes up by 3, and the variable cost remains the same, that must mean the price goes up by 3. So 156+3 = 159.

Remember selling price - variable cost = marginal contribution.