Assume that discontinuing Product J would result in a $100,000 increase in the contribution margin of other product lines. How many units of Product J would have to be sold next year for the company to be as well off as if it just dropped Product J and enjoyed the increase in contribution margin from other products?

A) 15,500 units.
B) 11,875 units.
C) 16,125 units.
D) 2,500 units.

Question

Partiksha Saini · Accepted Answer

Final Answer : B, Explanation :  To determine how many units of Product J need to be sold to be as well off as dropping it, we first calculate the additional contribution margin needed to offset the $100,000 increase from other products. The variable cost per unit is $960,000 / 10,000 units = $96. The sales commission is 15% of $160, which is $24. So, the total variable cost per unit is $96 + $24 = $120. The contribution margin per unit is $160 - $120 = $40. To cover the $100,000 increase with a $40 contribution margin per unit, Bingham needs to sell $100,000 / $40 = 2,500 units. However, this doesn't account for the fixed costs that are unaffected by the decision. The correct approach involves finding the break-even point in units considering the net loss and the $100,000 increase. The fixed costs (excluding variable costs and unaffected by the decision) are $195,000 (salaries) + $180,000 (advertising) + $170,000 (allocated overhead) = $545,000. With the $100,000 increase, the total to cover becomes $645,000. At a $40 contribution margin per unit, the number of units to break even is $645,000 / $40 = 16,125 units.

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