Question

In 2016, Crane sold 1000 units at $500 each, and earned net income of $40000. Variable expenses were $400 per unit, and fixed expenses were $260000. The same selling price is expected for 2017. Crane’s variable cost per unit will rise by 10% in 2017 due to increasing material costs, so they are tentatively planning to cut fixed costs by $10000. How many units must Crane sell in 2017 to maintain the same income level as 2016? 2417 3222 1000 4833

Answer 1

Ans:4833 Units

Expected Variable Cost per unit = $400 + ($400 * 10%) = $440
Expected Fixed Cost = $260,000 - $10,000 = $250,000
Selling Price = $500 per unit

Let the No. of units to be sold to earn Net Income of $40,000 be "X" Units

Net Income = Sales - Variable Expenses - Fixed Cost
$40,000 = ($500 * X) - ($440 * X) - $250,000
$290,000 = $500 X - $440 X
$290,000 = $60 X
X = 4,833.33 or 4,833 units

Therefore, 4,333 units must be sold to earn the Net Income of $40,000, if Variable Cost per unit is increased and Fixed Cost are reduced by $10,000.