Question

Sport Ready produces sport socks. The company has fixed expenses of $110,000 and variable expenses of $1.10 per package. Each package sells for $2.20. The number of packages Sport Ready needed to sell to earn a $24,000 operating income was 121,819 packages (rounded). If Sport Ready can decrease its variable costs to $1.00 per package by increasing its fixed costs to $125,000​, how many packages will it have to sell to generate $24,000 of operating​ income? Is this more or less than​ before? Why? Review Only LOADING... Click the icon to see the Worked Solution. Begin by identifying the formula to compute the sales in units at various levels of operating income using the contribution margin approach. ( Fixed expenses + Operating income ) / Contribution margin per unit = Sales in units ​(Round your answer up to the nearest whole​ unit.) Sport Ready will have to sell 124,167 packages to generate $24,000 of operating income. Is this more or less than​ before? Why? Sport Ready would have to sell 2,348 more packages of socks to earn $24,000 of operating income. The increase in fixed costs was not completely offset by the decrease in variable costs at the prior target profit volume of sales. Therefore, Sport Ready will need to sell more units in order to achieve its target profit level.

Answer 1

current contribution margin = $2.20 - $1.10 = $1.10

total fixed costs = $110,000

break even point = $110,000 / $1.10 = 100,000 units

sales level to earn $24,000 in operating profits = $134,000 / $1.10 = 121,819 units

if fixed costs increase to $125,000

new contribution margin = $2.20 - $1 = $1.20

new break even point = $125,000 / $1.20 = 104,167 units

sales level to earn $24,000 in operating profits = $149,000 / $1.20 = 124,167 units

The increase in contribution margin (9.09%) is not large enough to offset the increase in fixed costs (13.64%), that is why you will need to sell more units in order to make the same operating profits (124,167 - 121,819 = 2,348 units more).