Question

Power Industries (PI) produces low cost stand-up desks that sell for $440. PI requires a 25% return on sales. Currently feasible costs are $7,600,000 and a cost reduction of $340,000 is required to meet their target. PI assumes they will sell ____stand-up desks.

	A.	17,273
	B.	16,500
	C.	66,000
	D.	22,000

Answer 1

Answer)

Calculation of number of units to be sold to earn target return on sales

Let the total number of units to be sold be “Y”

Total Sales = Projected Costs + Target Profits

(Number of units Sold X selling price per unit) = (Currently Feasible costs – Cost Reduction) + (Total Sales X percentage of return on sales)

(Y units X $ 440 per unit) = ($ 7,600,000 - $ 340,000) + (Y units X $ 440 per unit X 25%)

$ 440 Y = $ 7,260,000 + $ 110 Y

$ 440 Y - $ 110 Y = $ 7,260,000

$ 330 Y = $ 7,260,000

Y = $ 7,260,000/ 330

    = 22,000 units

Therefore, 22,000 units are required to be sold to earn target profits. Accordingly, the correct answer is (D) 22,000.