Question

Perry Corporation produces and sells a single product. Data for that product are: Sales price per unit $275 Variable cost per unit $210 Fixed expenses for the month $640,000 Currently selling 10,500 units Upper management is considering using a biodegradable packaging which costs $12 more per unit but it produces less waste in the long run. Management plans to increase advertising by $11,000 per month to advertise this new feature to their packaging. They believe that environmentally friendly people will switch to their product resulting in an increase in sales of 2500 units per month. How many units would the company have to sell to maintain current operating income if these changes are implemented

Answer 1

13,085 units

Step-by-step explanation:

The computation of the units needed to sell is shown below:

But before that first we have to compute the current operating income which is shown below:

Current operating income = Sales - variable cost - Fixed cost

= ($275 - $210) × 10,500 units - $640,000

= $42,500

Now

Increased fixed cost is

= $640,000 + $11,000

= $651,000

And,

Increased variable cost per unit is

= $210 + $12

= $222

Now

Sales needed to maintain Current operating income is

= (Fixed cost + Current operating income) ÷ (Sales price per unit - Variable cost per unit)

= ($651,000 + $42,500) ÷ ($275 - $222)

= 13,085 units