Exercise 3-14A Conducting sensitivity analysis using the equation method LO 3-5
ID: 2332096 • Letter: E
Question
Exercise 3-14A Conducting sensitivity analysis using the equation method LO 3-5 Perez Company produces a product that has a variable cost of $25 per unit and a sales price of $55 per unit. The company's annual fixed costs total $650,000. It had net income of $250,000 in the previous year. In an effort to increase the company's market share, management is considering lowering the selling price to $49 per unit. Required a. If Perez desires to maintain net income of $250,000 how many additional units must it sell to justify the price decline? b. Assume that in addition to lowering its selling price to $49, Perez also desires to increase its net income by $84,000. Determine the number of units the company must sell to earn the desired income.Explanation / Answer
Sales price per unit = $55
Variable cost per unit = $25
Contribution per unit = Sales price per unit minus Variable cost per unit
Contribution per unit = $55 - $25 = $30
Let no. of units sold be X
Total contribution on sale of X units = $30X
Net income = Total contribution minus Fixed costs
$250,000 = $30X - $650,000
Solving for X, we get:
$30X = $900,000; X = 30,000
Therefore, no. of units sold = 30,000
a.
Sales price per unit = $49
Variable cost per unit = $25
Contribution per unit = Sales price per unit minus Variable cost per unit
Contribution per unit = $49 - $25 = $24
Let no. of units sold be Y
Total contribution on sale of Y units = $24Y
Net income = Total contribution minus Fixed costs
$250,000 = $24Y - $650,000
Solving for Y, we get:
$24Y = $900,000; Y = 37,500
Therefore, no. of units sold = 37,500
Additional units sold = 37,500 - 30,000 = 7,500 units
b.
Sales price per unit = $49
Variable cost per unit = $25
Contribution per unit = Sales price per unit minus Variable cost per unit
Contribution per unit = $49 - $25 = $24
Let no. of units sold be Z
Total contribution on sale of Y units = $24Z
Net income = Total contribution minus Fixed costs
$250,000 + $84,000 = $24Z - $650,000
Solving for Z, we get:
$24Z = $984,000; Z = 41,000
Therefore, no. of units sold = 41,000
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