Question

Capital One produces a single product, which it sells for $8.00 per unit. Variable costs per unit equal $3.20. The company expects short-term fixed costs to be $7,200 for the coming month, at the projected sales level of 20,000 units. Management is considering several alternative actions designed to improve operating results. In conjunction with this, they have created a profit-planning (that is, a CVP) model, which can be used to evaluate different scenarios. Suppose that Capital One's management believes that a $1,600 increase in the monthly promotion costs will provide a boost to sales. By how many units must sales increase during the month to justify the contemplated expenditure

Answer 1

334 units sales increase during the month must be required to justify the contemplated expenditure

Step-by-step explanation:

If management proposes an increase in monthly promotional costs (which is a fixed cost), then the units required to at least cover these extra fixed costs (break -even) must be determined.

Break -even (units) = Fixed Cost / Contribution per unit

= $1,600 / ($8.00 - $3.20)

= $1,600 / $4.80

= 333.333

= 334

Therefore, 334 units must contemplate this expenditure