Question

During the past year a company had total fixed costs of $700,000. Its product sold for $93 per unit. Variable costs during this time equaled $45 per unit. Next year the company is anticipating a 10% increase in total fixed costs and a $3 per unit decrease in variable costs, but would like to maintain its current selling price per unit. How many units must the company sell next year to earn $1,000,000. (Round answer to complete units.)

Answer 1

The company must sell 34706 units

Step-by-step explanation:

To calculate the units required to earn a target profit of $1000000 next year, we will use the break even analysis modified for target profit calculation.

The break even in units is calculated by dividing the Total fixed costs by the contribution margin per unit. To calculate the units required for target profit, we add the target profit amount to the fixed cost and divide it by the contribution margin per unit. Thus, the formula is,

Units required for target profit = (Total fixed cost + target profit) / Contribution margin per unit

Where contribution margin per unit = Selling price per unit - Variable cost per unit

New fixed costs = 700000 + 700000 * 0.1 = 770000

New variable cost = 45 - 3 = 42

New contribution margin per unit = 93 - 42 = $51

Units required for target profit = (770000 + 1000000) / 51

Units required for target profit = 34705.88 rounded off to 34706 units