[Anonymous]

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. 21,600

C. 21,960

D. 22,600

Answer: D. This is a detailed problem that requires working backwards through a contribution margin (CM) formatted income statement to determine total CM of $113,400. CM per unit ($5.25) is given by subtracting variable cost ($2.25) from price ($7.50). Year one units sold of 21,600 is calculated by dividing total CM ($113,400) by CM per unit ($5.25). Year two units sold (22,600 units) is equal to year one units plus 1,000 units.

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Where did the $113,400 contribution margin come from?

[jfreelov]

20,000 x (7.50 – 2.25) + 5,040 / (1 – 0.4) = 113,400

The contribution margin comes in two parts for this example: 1) The amount up until breakeven (20,000 x (7.50 – 2.25)), and 2) The amount after breakeven (5,040 / (1 – 0.4))

Although using the CM income statement results in an unnecessary amount of calculation.

More direct route to the final answer: 20,000 + 5,040 / [(1 – 0.4) x (7.50 – 2.25)] + 1,000 = 22,600

FAR - 71, 94
BEC - 91
REG - 51, 88
AUD - 89

[jfreelov]

20,000 x (7.50 – 2.25) + 5,040 / (1 – 0.4) = 113,400

The contribution margin comes in two parts for this example: 1) The amount up until breakeven (20,000 x (7.50 – 2.25)), and 2) The amount after breakeven (5,040 / (1 – 0.4))

Although using the CM income statement results in an unnecessary amount of calculation.

More direct route to the final answer: 20,000 + 5,040 / [(1 – 0.4) x (7.50 – 2.25)] + 1,000 = 22,600

FAR - 71, 94
BEC - 91
REG - 51, 88
AUD - 89

[Anonymous]

@jfreelov

Thanks man. This cost accounting income statement stuff is a beast.

[Anonymous]

@jfreelov

Thanks man. This cost accounting income statement stuff is a beast.

[musicamor]

Contribution margin doesn't contain fixed costs. It contains only the costs that pertain to the direct manufacturing of a good; therefore they contribute to the manufacturing.

Sales

<variable costs>

=Contribution Margin

In these types of questions; when you see fixed costs, you automatically note it and exclude it when attempting to calculate contribution margin. Additionally, you need to look out for other fixed cost labels such as selling costs, general & administrative, overhead, etc. The examiners will throw these curve balls at you.

Texas CPA - licensed in 2012!!!

[musicamor]

Contribution margin doesn't contain fixed costs. It contains only the costs that pertain to the direct manufacturing of a good; therefore they contribute to the manufacturing.

Sales

<variable costs>

=Contribution Margin

In these types of questions; when you see fixed costs, you automatically note it and exclude it when attempting to calculate contribution margin. Additionally, you need to look out for other fixed cost labels such as selling costs, general & administrative, overhead, etc. The examiners will throw these curve balls at you.

Texas CPA - licensed in 2012!!!

[Author]

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