Question

Innovate Company’s produces wired headphones that sell for $30.00 each. Variable costs are $21.00, and the company incurs fixed costs of $146,700.

Required

1. What is the contribution margin per unit and the contribution margin ratio?
2. In your own words, describe what the terms contribution margin per unit and contribution margin ratio mean, and describe the difference(s) between these two terms.
3. How many headphones must the company sell to breakeven?
4. What is the sales revenue the company must earn to have (pretax) income equal to 20% of revenue?
5. How many headphones must the company sell to earn after-tax profit of $113,400, if the tax rate is 30%?
6. Management of Innovate Company is considering increasing its advertising expenses by $61,200. By how much of an increase in sales units is necessary from expanded advertising to justify this expenditure (generate an incremental contribution margin of $61,200)?

Answer 1