Question

Big Foot produces sports socks. The company has fixed expenses of $80,000 and variable expenses of $0.80 per package. Each package sells for $1.60. The number of packages Big Foot needed to sell to earn a $24,000 operating income was 130,000 packages. If Big Foot can decrease its variable costs to $0.70 per package by increasing its fixed costs to $95,000​, how many packages will it have to sell to generate $24,000 of operating​ income? Is this more or less than​ before? Why? 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.) Big Foot will have to sell packages to generate $24,000 of operating income.

Answer 1

1. Big Foot will have to sell 132,222 packages to generate $24,000 of operating​ income

2. The News Sales in units of 132,222 packages is greater than 130,000 packages it had before by 2,222 packages.

3. The reason is that fixed expenses of $80,000 it had before is lower than the New Fixed expenses of $95,000, and also because variable expenses of $0.80 per package it had before is higher than the new variable expenses per package of $0.70.

Step-by-step explanation:

From the question, we have:

New Fixed expenses = $95,000

New variable expenses per package = $0.70

New operating​ income to generate = $24,000

Selling price per package = $1.60

New contribution margin per package = Selling price per package - New variable expenses per package = $1.60 - $0.70 = $0.9

News Sales in units = (New Fixed expenses + New Operating income ) / New contribution margin per package ....................(1)

Substituting relevant values into equation (1), we have:

News Sales in units = ($95,000 + $24,000 ) / $0.9 = $119,000 / $0.9 = 132,222 packages

Therefore, we have:

1. Big Foot will have to sell 132,222 packages to generate $24,000 of operating​ income

2. The News Sales in units of 132,222 packages is greater than 130,000 packages it had before by 2,222 packages.

3. The raason is that fixed expenses of $80,000 it had before is lower than the New Fixed expenses of $95,000, and also because and variable expenses of $0.80 per package it had before is higher than the new variable expenses per package of $0.70.