Question

Head-First Company plans to sell 5,000 bicycle helmets at $75 each in the coming year. Unit variable cost is $45 (includes direct materials, direct labor, variable factory overhead, and variable selling expense). Total fixed cost equals $49,500 (includes fixed factory overhead and fixed selling and administrative expense).

	Required:
1.	Calculate the number of helmets Head-First must sell to earn operating income of $81,900.
2.	Check your answer by preparing a contribution margin income statement based on the number of units calculated.

Answer 1

Solution 1:

Contribution margin per unit = $75 - $45 = $30 per unit

Number of helmets to earn operating income of $81,900 = (Target income + Fixed costs) / Contribution margin per unit

= ($81900 + $49500) / $30 = 4380 units

Solution 2:

Head-first Company
Contribution format Income Statement
Sales (4380*$75)	$3,28,500
Less: Variable costs (4380*$45)	$1,97,100
Contribution Margin	$1,31,400
Less: Fixed costs	$49,500
Net Operating Income	$81,900