Question

Newton Company currently produces and sells 4,000 units of a product that has a contribution margin of $6 per unit. The company sells the product for a sales price of $20 per unit. Fixed costs are $18,000. The company is considering investing in new technology that would decrease the variable cost per unit to $8 per unit and double total fixed costs. The company expects the new technology to increase production and sales to 9,000 units of product. What sales price would have to be charged to earn a $99,000 target profit assuming the investment in technology is made?

A. $22

B. $23

C. $15

D. $13

Answer 1

	Amount in $
Variable Cost ( 9,000 x 8 )	72,000
Add :Fixed Costs ( 18,000 x 2 )	36,000
Add :Target profit	99,000
Amount of total sales should be	207,000
Sales price should be	$ 23	( 207,000 / 9,000 )
Correct answer is option b ( i.e. $ 23).