ExpertMedium1 markMultiple Choice
CPA · Question 20 · Area I: Business Analysis
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?
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:
A.
5,000 units
B.
7,000 units
C.
2,800 units
D.
6,000 units
How to approach this question
Formula: (Fixed Costs + Target Profit) / Contribution Margin per Unit.
Full Answer
B.7,000 units✓ Correct
B
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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