Question

Conan Company has total fixed costs of $112,000. Its product sells for $35 per unit and variable costs amount to $25 per unit. Next year Conan Company wishes to earn a pretax income that equals 10% of fixed costs.

How many units must be sold to achieve this target income level?

Answer 1

Solution: Selling price per unit = $35

Variable cost per unit = $25

Contribution margin per unit = Selling price per unit - Variable cost per unit

= $35 - $25 = $10

Total fixed costs = $112,000

Next year pretax income earn by Conan Company = 10% of fixed costs

= 10% of $112,000 = $11,200

Units must be achieved to achieve this target income level

= (Fixed costs + Desired profit) / Contribution margin per unit

= ($112,000 + $11,200) / $10

= $123,200 / $ 10 = 12,320 units

Conan company should sold 12,320 units next year to achieve this target income level.

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