Question

Last year, Sinclair Company’s single product had a selling price of $25 per unit, reported a profit of $20,000, had a contribution margin ratio of 40% and incurred variable costs totaling $180,000. Because of competition, Sinclair Company will be forced in the current year to reduce its selling price by $2.00 per unit. Ignore income taxes. How many units must be sold in the current year to earn the same profit as was earned last year?

Answer 1

15,000 units

Step-by-step explanation:

In this question we use the formula of break-even point in unit sales which is shown below:

= (Fixed expenses + target profit) ÷ (Contribution margin per unit)

where,

Contribution margin per unit = Selling price per unit - Variable expense per unit

The selling price is $25 - $2 = $23

And, the variable expense per unit would be = $25 × 60% = $15

So, it would be $23 - $15 = $8

We know that

Operating profit = Sales - variable cost - fixed cost

$20,000 = $300,000 - $180,000 - fixed cost

So, the fixed cost would be

= $100,000

And, the sales would be

= Variable cost × 100 ÷ variable cost ratio

= $180,000 × 100 ÷ 60

= $300,000

And, the other items values would remain the same

Now put these values to the above formula

So, the value would equal to

= ($100,000 + $20,000) ÷ ($8)

= ($120,000) ÷ ($8)

= 15,000 units