Capital One produces a single product, which it sells for $8.00 per unit. Variable costs per unit equal $3.20. The company expects short-term fixed costs to be $7,200 for the coming month, at the projected sales level of 20,000 units. Management is considering several alternative actions designed to improve operating results. In conjunction with this, they have created a profit-planning (that is, a CVP) model, which can be used to evaluate different scenarios.

Suppose that Capital One's management believes that a $1,600 increase in the monthly promotion costs will provide a boost to sales. By how many units must sales increase during the month to justify the contemplated expenditure? Round answer up to the nearest whole number.

Question

Suppose that Capital One's management believes that a $1,600 increase in the monthly promotion costs will provide a boost to sales. By how many units must sales increase during the month to justify the contemplated expenditure? Round answer up to the nearest whole number.

Quizplus · Accepted Answer

First, we need to calculate Capital One's contribution margin, which is the selling price per unit minus variable cost per unit.

Contribution Margin = Selling Price per Unit - Variable Costs per Unit
Contribution Margin = $8.00 - $3.20
Contribution Margin = $4.80

Next, we can use the contribution margin to calculate the breakeven point (BEP) in units:

BEP (in Units) = Fixed Costs ÷ Contribution Margin
BEP (in Units) = $7,200 ÷ $4.80
BEP (in Units) = 1,500 units

This means that Capital One needs to sell 1,500 units to cover their fixed and variable costs and break even.

To justify the $1,600 increase in promotional costs, we need to calculate how many additional units need to be sold to cover the increase in costs:

Additional Units = Additional Fixed Costs ÷ Contribution Margin
Additional Units = $1,600 ÷ $4.80
Additional Units = 333.33 units

Rounding up to the nearest whole number, we get 334 units, which is answer choice B.

Capital One Produces a Single Product, Which It Sells for $8.00