[Anonymous]

Here is a problem I am having issues understanding:

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

Incorrect…

This incorrect answer could be due to multiple errors. 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.

I would think that total CM would be $110,040

20,000 = X / 5.25 (CM)

20,000*5.25= $105,000 (Fixed Costs) + $5,040 (Profit) = $110,040/5.25 = 20,960 + 1,000 (addtl units yr 2)= 21,960.

Where am I wrong in figuring out the total Contribution Margin? I am not understanding where the $113,400 is coming from.

Any help is greatly appreciated!

[Anonymous]

I remember this question. 113400 is 105000 fixed cost plus 8400 (net income before tax 5040/0.6)

[Anonymous]

Awesome thanks! Don't know why I didn't think of that. I'm so used to all of these measurements as pretax so I'm usually only figuring it as post tax. I'm surprised that's not recognized in the response on the wrong answer.

[Author]

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