[jenyvecad]

Can someone explain the first part of the solution? Where did they get CM = $113,500?

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

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.

BEC - 71, Jan 2014 84! DONE!!!!
AUD - 75
REG - 75
FAR - 83

[gt5717b]

The CM/unit = $5.25 and the FC is calculated as $105,000.

You know the Net Income from the previous year was $5,040, but that's after a 40% tax, so before taxes, the amount was $8,400.

$8,400 = $5.25(x) – $105,000

which gives you

$5.25(x) = $113,400

solving for (x) gives you 21,600 units sold last year

They really skipped a few steps in explaining that answer.

REG - 89
FAR - 84
AUD - 73, 86
BEC - 89

GA Licensed CPA

[gt5717b]

The CM/unit = $5.25 and the FC is calculated as $105,000.

You know the Net Income from the previous year was $5,040, but that's after a 40% tax, so before taxes, the amount was $8,400.

$8,400 = $5.25(x) – $105,000

which gives you

$5.25(x) = $113,400

solving for (x) gives you 21,600 units sold last year

They really skipped a few steps in explaining that answer.

REG - 89
FAR - 84
AUD - 73, 86
BEC - 89

GA Licensed CPA

[jenyvecad]

OMG! I forgot about taxes… I have been racking my brain for a while on this question… Thank you so much for bringing that to light….

BEC - 71, Jan 2014 84! DONE!!!!
AUD - 75
REG - 75
FAR - 83

[jenyvecad]

OMG! I forgot about taxes… I have been racking my brain for a while on this question… Thank you so much for bringing that to light….

BEC - 71, Jan 2014 84! DONE!!!!
AUD - 75
REG - 75
FAR - 83

[gt5717b]

@jenyvecad, I did the problem about 3 times before I realized there was tax involved.

RTFQ gets you every time!

REG - 89
FAR - 84
AUD - 73, 86
BEC - 89

GA Licensed CPA

[gt5717b]

@jenyvecad, I did the problem about 3 times before I realized there was tax involved.

RTFQ gets you every time!

REG - 89
FAR - 84
AUD - 73, 86
BEC - 89

GA Licensed CPA

[jlough]

@OP- I did this question twice myself! it drove me nuts! when are you sitting? good luck

F- 7/13- 84
R- 10/13- 79
A- 11/13- 99
B- 1/14- 86

Licensed in PA- 3/20/2014

This exam ALMOST defeated me back in 2006-2008, but I came back and WON!

[jlough]

@OP- I did this question twice myself! it drove me nuts! when are you sitting? good luck

F- 7/13- 84
R- 10/13- 79
A- 11/13- 99
B- 1/14- 86

Licensed in PA- 3/20/2014

This exam ALMOST defeated me back in 2006-2008, but I came back and WON!

[jenyvecad]

Less than two weeks and hopefully I will be done.

BEC - 71, Jan 2014 84! DONE!!!!
AUD - 75
REG - 75
FAR - 83

[jenyvecad]

Less than two weeks and hopefully I will be done.

BEC - 71, Jan 2014 84! DONE!!!!
AUD - 75
REG - 75
FAR - 83

[jenyvecad]

Good Luck to you as well. @jlough

BEC - 71, Jan 2014 84! DONE!!!!
AUD - 75
REG - 75
FAR - 83

[jenyvecad]

Good Luck to you as well. @jlough

BEC - 71, Jan 2014 84! DONE!!!!
AUD - 75
REG - 75
FAR - 83

[Author]

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