Question

Luxvano Co. produced and sold 65,000 units during the year at an average price of $20 per unit. Variable manufacturing costs were $9 per unit, and variable marketing costs were $3 per unit sold. Fixed costs amounted to $220,000 for manufacturing and $80,000 for marketing. There was no year-end work-in-process inventory. Assume the income tax rate of 40%.

d. Compute the sales units required to earn a net income (income after taxes) of $120,000 during the year.

e. If Luxvano’s variable manufacturing costs are expected to increase by 10 percent in the coming year, compute the selling price that would yield the same current contribution margin ratio in the coming year.

f. Compute the required sales units to achieve operating income of 20 percent of sales revenue.

Answer 1

d.

Fixed costs	300000
Add: Taget Profit	120000
Total Amount to be earned	420000
/Contribution Margin per unit (20-9-3)	8
Number of Units to earn target income	52500

e.

Sales Price	20
Less: Variable cost per unit	12
Contribution Margin per unit	8
Existing Contribution Margin ratio	40%

Required Contribution margin ratio	40%
Therefore, Required Variable Cost ratio	60%
New Variable cost per unit ($12*110%	13.2
New Selling Price (Variable cost per unit/ratio)	22

f.

Fixed costs	300000
Add: Taget Profit (65000*20*20%)	260000
Total Amount to be earned	560000
/Contribution Margin per unit (20-9-3)	8
Number of Units to earn target income	70000