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21 November, 10:24

Locus Company has total fixed costs of $112,000. Its product sells for $35 per unit and variable costs amount to $25 per unit. Next year Locus Company wishes to earn a pretax income that equals 10% of fixed costs. How many units must be sold to achieve this target income level?

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Answers (2)
  1. 21 November, 11:16
    0
    12,320

    Explanation:

    First, you have to find the 10% of the fixed costs:

    $112,000*10% = $11,200

    Now, you need to find the amount of units that multiply for the price that is $35 minus the costs would give a pretax income of $11,200:

    Income = Sales-Fixed Costs-Variable costs

    11,200 = (35*Q) - 112,000 - (25*Q), Q = quantity of products sold

    11,200+112,000 = 35Q-25Q

    123,200=10Q

    Q=123,200/10

    Q=12,320

    The number of units that must be sold to achieve this target income level is 12,320.
  2. 21 November, 13:59
    0
    12,320 units

    Explanation

    First we have to determine the target profit.

    Desired Profit = $112,000 x 10% = $11,200

    Now we will calculate the contribution margin which is a net value of selling price and variable cost.

    Contribution margin = Sales - Variable cost

    Contribution margin = $35 - $25

    Contribution margin = $10 per unit

    Formula for target sales is as follow

    Target Sales = (Fixed cost + Target profit) / Contribution margin

    Target Sales = ($112,000 + $11,200) / $10

    Target Sales = $123,200 / $10 = 12,320 units
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