Question

Acme Corp has fixed has fixed overhead of $250,000 for its plant and salaries of $350,000....

Acme Corp has fixed has fixed overhead of $250,000 for its plant and salaries of
$350,000. It sells high quality industrial values for $200 each, which is $40 more than its competitors. Variable productions costs are $140. Last year Acme sold 50,000 units. This year Acme sold 40,000 units. Total industry unit sales this year were
250,000.
Acme is investing in new materials for production next year and expects to earn a 20% margin and wishes to report a $3,000,000 profit to shareholders. Fixed costs and prices are expected to remain unchanged. This means that Acme’s target revenue will fall in which of the following ranges:

1 - 5 million
6 - 10 million
11 - 15 million
16 - 20 million
none of the above
Business   Economics   
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Homework Answers

Answer #1

Total fixed expenses= $250000 +$350000 = $ 600000

Contribution per unit = $200 - $140 = $60 per unit

Break even units = $600000/60 = 10000 units

Target profit = $3000000

Therefore target contribution = $3600000

Units to be sold for target contribution = $3600000/60 = $60000 units

Revenue required to achieve target = 60000 * 200 = $12,000,000

Therefore if the selling price remains unchanged range = 11-15 million

But it is given in question that for coming year margin is 20% (assuming on sales) therefore on cost it would be 25%

Therefore contribution margin per unit = $140*25% = $35 per unit

Revenue in units required to achieve target = $3600000/$35 = 102857.143

Revenue in dollar required to achieve target = 102857.143 * (140+35) = $18,000,000

Therefore as given in question if sale price changes to $175 then to achieve target revenue needs to be in the range = 16-20 million

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