Exhibit 21-13 Refer to Exhibit 21-13. What dollar amounts go in blanks (P)and (Q), respectively?

Question

Exhibit 21-13 ​  Refer to Exhibit 21-13.  What dollar amounts go in blanks (P)and (Q), respectively?

Quizplus · Accepted Answer

To find the dollar amounts for (P) and (Q), we need to calculate the weighted average contribution margin per unit first.

Weighted average contribution margin per unit= [(5 x $15) + (10 x $10) + (15 x $5)] / 30 = $6.67

(P) is the maximum amount of decrease in unit selling price that would not affect the decision to continue selling a product. It is calculated by dividing the total fixed costs ($2,800) by the contribution margin ratio (40%).

(P) = $2,800 / 0.4 = $7,000 / 2,500 units = $2.80 per unit

(Q) is the number of units that need to be sold to earn a target profit of $2,475. It is calculated by adding the target profit to the total fixed costs and then dividing the sum by the contribution margin per unit.

(Q) = ($2,475 + $2,800) / $6.67 = $5,275 / $6.67 = 791 units

The total revenue for 791 units sold is $39,550.

The total cost for 791 units sold is 
[(5 x $10) + (10 x $8) + (15 x $5)] x 791 = $25,895

Therefore, the profit is $13,655.

(P) is the maximum decrease in unit selling price. If you decrease the selling price beyond this point, then you will not earn a profit. In other words, the selling price cannot be lower than $10 - $2.80 = $7.20. However, if the selling price is $7.20, then the profit will be zero.

(Q) is the number of units to be sold. If you sell more than 1,000 units, then you will earn a profit. However, you need to sell at least 791 units to earn the target profit of $2,475.

Therefore, the answer is D: $93.33 for (P) and $82.50 for (Q).

Exhibit 21-13 ​ Refer to Exhibit 21-13

Exhibit 21-13 Refer to Exhibit 21-13