Question

Locus Company has total fixed costs of $121,000. Its product sells for $67 per unit and variable costs amount to $57 per unit. Next year Locus Company wishes to earn a pretax income that equals 15% of fixed costs. How many units must be sold to achieve this target income level

Answer 1

13,915 units

Step-by-step explanation:

With regards to the above, we need to determine first the target or desired profit.

Desired profit = $121,000 × 15% = $18,150

The next step is to calculate the contribution margin, which is the difference between selling price and variable cost.

Contribution margin = Sales - Variable cost

Contribution margin = $67 - $57

Contribution margin = $10 per unit

Target sales is therefore;

Target sales = (Fixed cost + Target profit) / Contribution margin

Target sales = ($121,000 + $18,150) / $10

Target sales = $139,150 / $10

Target sales = 13,915 units