Conan 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 Conan 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?
A) 1,120.
B) 8,214.
C) 11,200.
D) 12,320.
E) 14,080.

Question

Quizplus · Accepted Answer

The first step is to calculate the total pretax income that the company wishes to earn, which is 10% of fixed costs:

Pretax income = 10% x Fixed costs
Pretax income = 10% x $112,000
Pretax income = $11,200

Then, we need to use the contribution margin ratio to calculate the number of units that need to be sold to achieve this target income level:

Contribution margin ratio = (Sales - Variable costs) / Sales
Contribution margin ratio = ($35 - $25) / $35
Contribution margin ratio = 0.286

Break-even point (in units) = Fixed costs / Contribution margin per unit
Break-even point (in units) = $112,000 / ($35 - $25)
Break-even point (in units) = 11,200 units

Now that we have the break-even point, we can use the following formula to calculate the number of units that need to be sold to achieve the target income level:

Target units = (Fixed costs + Target pretax income) / Contribution margin per unit
Target units = ($112,000 + $11,200) / ($35 - $25)
Target units = 12,320 units

Therefore, the correct answer is D) 12,320 units.

Conan Company Has Total Fixed Costs of $112,000