This is Becker…
Why aren't we using the change? I thought I would find the FC for prior year then increase that by 10%
A ceramics manufacturer sold cups last year for $7.50 each. Variable costs of manufacturing were $2.25 per unit. The company needed to sell 20,000 cups to break even. Net income was $5,040. This year, the company expects the following changes: sales price per cup to be $9.00; variable manufacturing costs to increase 33.3%; fixed costs to increase 10%; and the income tax rate to remain at 40%. Sales in the coming year are expected to exceed last year's sales by 1,000 units. How many units does the company expect to sell this year?
a.
21,000
b.
22,600
c.
21,600
d.
21,960
Explanation
Choice “b” is correct. Current year sales (in units) are expected to be 22,600, 1,000 more than the 21,600 units sold in the current year. The 21,600 units sold last year is derived from computations of last year sales in units based on last year cost structure data as follows (note that current year increases are irrelevant):
Step 1: Calculate last year's contribution margin per unit (CM/unit)
CM/unit = Sales price per unit − Variable cost per unit = $7.50 − $2.25 = $5.25
Step 2: Determine last year's fixed costs using the breakeven formula
Breakeven units = Fixed costs / Contribution margin per unit
20,000 = Fixed costs / $5.25
Fixed costs = 20,000 × $5.25 = $105,000
Step 3: Calculate last year's before-tax profit
Before-tax profit = After-tax profit / (1 − tax rate)
Before-tax profit = $5,040 / 60% = $8,400
Step 4: Calculate units sold last year
Units sold to achieve profit = (Fixed costs + Profit) / Contribution margin per unit
Units sold last year = ($105,000 + $8,400) / $5.25 = 21,600
.