Jones Company produces a product that has a variable cost of $27 per unit and a
ID: 2421329 • Letter: J
Question
Jones Company produces a product that has a variable cost of $27 per unit and a sales price of $59 per unit. The company’s annual fixed costs total $720,000. It had net income of $280,000 in the previous year. In an effort to increase the company’s market share, management is considering lowering the selling price to $52 per unit. Required: a. If Jones desires to maintain net income of $280,000 how many additional units must it sell to justify the price decline? b. Assume that in addition to lowering its selling price to $52, Jones also desires to increase its net income by $75,000. Determine the number of units the company must sell to earn the desired income.
Explanation / Answer
a. The number of additional units required to be sold to maintain net income at $ 280,000 is 8,750 units
If the seliing price is reduced to $ 52, contribution margin per unit drops to $ 25. If total contribution remains the same at $ 1,000,000, sales volume should increase to 1,000,000 / 25 = 40,000 units.
b. Total contribution = Fixed cost + net income = 720,000 + 355,000 = $ 1,075,000
Contribution margin per unit remaining at $ 25, the number of units required to be sold = 1,075,000 / 25 = 43,000.
$ $ Sales revenue (31,250 x 59 ) 1,843,750 Less variable cost 843,750 Contribution margin ( 31,250 x 32 ) 1,000,000 Less Fixed costs 720,000 Net income 280,000Related Questions
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