ABC Company reported the following information for 2019: Sales .................

Question

 ABC Company reported the following information for 2019:    Sales ...............................   14,000 units   Margin ..............................     25%   Variable cost per unit ..............    $8.80   Average operating assets ............   $550,000   Return on investment ................     14%   Minimum required rate of return .....      9%  Management of ABC Company is beginning to budget for 2020 and would like answers to some what-if scenarios.  Calculate the number of units ABC Company needed to sell in 2019 in order for its residual income to be 204% larger than what was reported

Explanation / Answer

As we know that, return on investment = net income / Avg. operating assets and here it is given to be 14 % .

So, 14 % = Net income / 550000

Net income = $ 77000

Given margin = 25 % which means net income / sales = 25 % , sales = 77000 / 25 % = $ 308000

Selling price per unit = 308000 / 14000 = $ 22 per unit

Now residual Income = Actual Income - Required operating income

77000 - ( 550000 * 9 % ) = $ 27500

Propsed residual income = 27500 + 204 % = $ 83600

For this Actual Income need to be :-

Actual Income - ( 550000 * 9 % ) = 83600

Actual Income = $ 133100

Now again,

margin = 25 % which means net income / sales = 25 % , sales = 133100 / 25 % = $ 532400

No. of units to be sold = 532400 / 22 = 24200 units

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