Question

A firm produces and sells a product with a contribution margin of $32 per unit. The firm is presently selling 90,000 units and earning $320,000 in pre-tax income. If the firm desires to increase its pre-tax income to $ 400,000, how many more units must it sell?

Answer 1

Total contribution margin = contribution margin per unit * total units

= $ 32 Per Unit * 90,000 Units

= $ 2,880,000

Pre Tax Income = $ 320,000

Hence Fixed Cost = Total contribution margin - Pre Tax Income

= $ 2,880,000 - $ 320,000

= $ 2,560,000

pre-tax income required = $ 400,000

Total contribution margin required = Total Fixed Cost + pre-tax income required

= $ 2,560,000 + $ 400,000

= $ 2,960,000

Units to be Sold = Total contribution margin required / Total contribution margin Per Unit

= $ 2,960,000 / $ 32

= 92,500 units

hence the correct answer is 92,500 units