Question

A venture capital investment group received a proposal from Wireless Solutions to produce a new smart phone. The variable cost per unit is estimated at $250, the sales price would be set at twice the VC/unit, fixed costs are estimated at $750,000, and the investors will put up the funds if the project is likely to have an operating income of $500,000 or more. What sales volume would be required in order to meet this profit goal?

Answer 1

Variable Cost per unit = $250

Selling Price per unit = 2 * Variable Cost per unit
Selling Price per unit = 2 * $250
Selling Price per unit = $500

Fixed Costs = $750,000
Desired Income = $500,000

Contribution Margin per unit = Selling Price per unit - Variable Cost per unit
Contribution Margin per unit = $500 - $250
Contribution Margin per unit = $250

Required Sale in units = (Fixed Costs + Desired Income) / Contribution Margin per unit
Required Sale in units = ($750,000 + $500,000) / $250
Required Sale in units = $1,250,000 / $250
Required Sale in units = 5,000

So, the company needs to sell 5,000 units or more if it wants to earn an operating income of $500,000 or more.