Question

If fixed costs are $400,000 and the unit contribution margin is $20, how many units must be sold in order to realize an operating income of $250,000

Answer 1

32,500 units must be sold to realize an operating income of $250,000.

Step-by-step explanation:

a) Calculations:

Using the break-even plus target profit analysis, we can calculate the target quantity of sales that will generate a target profit.

To break-even, the company needs to sell the following quantity,

Break-even point = fixed costs/contribution margin per unit = $400,000/$20 = 20,000 units.

To achieve a target profit, the company needs to sell the following quantity,

Break-even with target profit = (Fixed cost + target profit)/contribution margin per unit = ($400,000 + 250,000) / $20 = $650,000/$20 = 32,500 units.

b) Break-even analysis is a managerial accounting technique for determining the units should a company can sell or produce in order to even revenue and costs. From the analysis, a company can also determine the units to sell in order to realize a target profit. This helps a lot in decision making.