A company sells a single product for $50. Variable costs are $30 per unit. Total fixed costs are $100,000. The company wants to achieve a target operating income of $40,000. How many units must be sold?

Answer options:

5,000 units

7,000 units

2,800 units

6,000 units

How to approach this question

Formula: (Fixed Costs + Target Profit) / Contribution Margin per Unit.

Full Answer

B.7,000 units✓ Correct

Required Units = (Fixed Costs + Target Operating Income) / Contribution Margin per Unit.<br/>CM per Unit = $50 - $30 = $20.<br/>Required Units = ($100,000 + $40,000) / $20 = 7,000 units.

Common mistakes

Forgetting to add target income to fixed costs; using price instead of CM.

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