Curtis Company anticipates selling 10,000 units next year. The company wants to earn a net income equal to 10% of sales. If variable expenses are $12 per unit and fixed expenses total $78,000 per year, what selling price must be established to achieve the desired level of net income?

Question

Quizplus · Accepted Answer

To find the selling price, we need to use the contribution margin ratio (CMR) formula:

CMR = (Sales - Variable Expenses) / Sales

We know that the company wants to earn a net income equal to 10% of sales, so we can set up the following equation:

Net Income = 0.1 * Sales

Substituting in the formula for CMR:

CMR = (Sales - Variable Expenses) / Sales 
CMR = (Sales - 12) / Sales

We can rearrange this equation to solve for the selling price:

Selling Price = Variable Expenses + (Desired Net Income / Unit Sales) 
Selling Price = $12 + ($100,000 / 10,000) 
Selling Price = $22

Therefore, the company must establish a selling price of $22 per unit to achieve the desired level of net income. Answer choice C is correct.

Curtis Company Anticipates Selling 10,000 Units Next Year