Question

Naylor company has $210,000 of net income in 2013 when the selling price per units was $150, the variable costs per unit were $90, and the fixed costs were $570,000. Management expects per unit data and total fixed costs to remain the same in 2013. The president of Naylor Ocmpany is under pressure from stockholders to increase net income by $52,000 in 2014.
Instructions
a) COmpute the number of units sold in 2013.
b) compute the number of units that would have to be sold in 2014 to reach the stockholders' desired profit level.
c) Assume that naylor company sells the same number of units in 2014 as it did in 2013. What would the selling price have to be in order to reacch the stockholders' desired profit level?
Correct answers:
a) 13,000
b) 13,867 (rounded)
c) $154

Answer 1

Answer:

Units sold in 2013: 13,000

Units sold in 2014 to achieve desired level of profit: 13,867

Selling price to achieve desired level of profit with 13,000 Units: $154  

Explanation:

Part A:

Contribution per Unit = Selling Price per unit – Variable Cost per unit  

Contribution per Unit = $150 - $90 = $60

Net Income = Total Contribution – Fixed Costs  

So, Total Contribution = Net Income + Fixed Costs

      Total Contribution = $210,000 + $570,000 = $780,000

Now, we can calculate the number of Units sold in the year 2013.

Units Sold in 2013 = Total Contribution ÷ Contribution per unit

Units Sold in 2013 = $780,000 ÷ $60 = 13,000 Units

Part B:

Contribution per Unit = Selling Price per unit – Variable Cost per unit  

Contribution per Unit = $150 - $90 = $60

Total Contribution = (Net Income in 2013 + Additional Net Income for 2014) + Fixed Costs

Total Contribution = ($210,000 + $52,000) + $570,000 = $832,000

Units sold in 2014 to achieve desired level of profit = Total Contribution ÷ Contribution per unit =

Units Sold in 2014 = $832,000 ÷ $60 = 13,867 Units

Part C:

Total Contribution = (Net Income in 2013 + Additional Net Income for 2014) + Fixed Costs

Total Contribution = ($210,000 + $52,000) + $570,000 = $832,000

Units to be sold in 2014: 13,000

Contribution per unit = Total contribution ÷ Number of units to be sold  

Contribution per unit = $832,000 ÷ 13,000 = $64

We can compute the new selling price for 2014 using the other formula of contribution i.e. Contribution per Unit = Selling Price per unit – Variable Cost per unit

So, Selling Price per Unit = Contribution per unit + Variable Cost per unit  

Selling Price per Unit = $64 + $90 = $154

Excel file is attached for your reference.