Durant Manufacturers has performed extensive studies on its costs and production
ID: 2416870 • Letter: D
Question
Durant Manufacturers has performed extensive studies on its costs and production and estimates the following annual costs based on 159,000 units (produced and sold):
Total Annual
Costs
(159,000 units)
Direct material $ 295,000
Direct labor 264,000
Manufacturing overhead 223,000
Selling, general, and administrative 137,000
Total $ 919,000
)
Compute Durant's dollar sales that will yield a projected 22 percent profit on sales, assuming variable costs per unit are 50 percent of the selling price per unit and fixed costs are $616,000.
Management believes that a selling price of $7.50 per unit is reasonable given current market conditions. How many units must Durant sell to generate the revenues (dollar sales) determined in requirement (b)?
Explanation / Answer
Let Sales for desired Profit = S
Desired profit = 22% of $ or 0.22S
ContributionMargin Ratio = 100% - Variable cost per unit of sales = 100% - 50% = 50% or 0.50
Break even sales = fixed cost / Contribution margin ratio = $ 616,000 / 0.50 = $ 1,232,000
sales for desired profit = Break even sales + ( Desired profit / contribution margin ratio)
S = $ 1,232,000 + 0.22S/0.5
S = $ 1,232,000 + 0.44 S
S - 0.44 S = $ 1,232,000
0.56 S = $ 1,232,000
S = $ 1,232,000 / 0.56
S = $ 2,200,000
To acheive desired profit of 22% on sales company has to do ( dollor sale ) sale of $ 2,200,000
Units to be sell = $ 2,200,000 / 7.50 = 293,334 Units
Note = selling price is $ 7.50
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