Company currently sells widgets for 160 per unit The variabl

Company currently sells widgets for $160 per unit. The variable cost is $60 per unit and total fixed costs equal $240,000 per year. Sales are currently 40,000 units annually. Required: a. Calculate the contribution margin per unit. b. Calculate break-even in units. c. Calculate break-even in sales dollars d. Calculate the current operating income assuming there were no income taxes. e. The company is considering a 10% drop in selling price that it believes will raise units sold by 15%. Assuming all costs stay the same, what is the impact on income if this change is made?

Solution

a Contribution margin per unit = 160-60 = $100 b Break even point in unit = 240000/100 = 2400 c Break even point in sales dollars = 2400*160= $384000 d Current operating income= (40000*100)-240000= $3760000 e Revised selling price = 160*0.9 = $144 Revised sales volume = 40000*1.15= 46000 Contribution margin per unit = 144-60= $84 Revised operating income= (46000*84)-240000= $3624000 Operating income decreases by $136000 (3760000-3624000)