Corporation X sold 25,000 units of product last year.The contribution margin per unit was $2, and fixed expenses totaled $40,000 for the year.This year fixed expenses are expected to increase to $45,000, but the contribution margin per unit will remain unchanged at $2.How many units must be sold this year to earn the same net operating income as was earned last year:

A) 22,500
B) 27,500
C) 35,000
D) 2,500

Question

murray prince · Accepted Answer

Final Answer : B, Explanation :  To find the number of units that must be sold this year to earn the same net operating income as last year, we need to calculate the total contribution margin and deduct the fixed expenses to find the net operating income.Last year's net operating income was:Contribution margin = 25,000 units x $2 per unit = $50,000Net operating income = $50,000 - $40,000 fixed expenses = $10,000To earn the same net operating income this year with fixed expenses of $45,000, we can use the formula:Net operating income = (Sales volume x Contribution margin) - Fixed expensesSubstituting the known values:$10,000 = (Sales volume x $2) - $45,000Solving for sales volume:Sales volume = ($10,000 + $45,000)/$2 = 27,500 unitsTherefore, the answer is B) 27,500 units. Profit = (Unit CM × Q)- Fixed expenses= ($2 per unit × 25,000 units)- $40,000 = $10,000Unit sales to attain a target profit = (Target profit + Fixed expenses)÷ Unit CM= ($10,000 + $45,000)÷ $2 per unit = 27,500 units

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