Accounting: What the Numbers Mean 9th Edition by Wayne W McManus, Daniel F Viele, David H Marshall

Exercise 35

For the following questions, circle the best response. Answers are at the end of this chapter.

With the following data, how many units must be sold to generate an operating income of $20,000?

a. 800.

b. 1,000.

c. 2,500.

d. 3,500.

e. 4,000.

Step 1 of 2

The volume of units to be sold to generate the desired operating income can be determined using the following equation:

Volume in units for desired operating income =

Fixed expenses are $40,000 and desired operating income is $20,000.

We need to calculate the contribution margin per unit in order to calculate the volume in units to be sold for earning desired operating income of $20,000.

Contribution margin per unit

Contribution margin is the amount that is the contribution to fixed expenses and operating income from sale of products or provision of services. It is the difference between the sales revenue and variable expenses. It is calculated as follows:

Selling price is $50 per unit and contribution margin ratio is 30%

Contribution margin per unit =

=

= $15 per unit