Capital One produces a single product,which it sells for $8.00 per unit.Variable costs per unit equal $3.20.The company expected total 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 model,which can be used to evaluate different scenarios.
Suppose that management believes that a $1,600 increase in the monthly promotion costs will provide a boost to sales.By what amount must sales increase during the month to justify the contemplated expenditure? Round up to the nearest whole number.

Question

Quizplus · Accepted Answer

For every unit sold, the company makes a contribution of $8.00 - $3.20 = $4.80 towards covering the fixed costs and generating profits.

To cover the additional promotion costs of $1,600, the company needs to sell an additional $1,600/$4.80 = 333.33 units. Rounding up to the nearest whole number, the company needs to sell 334 additional units to justify the contemplated expenditure.

Capital One Produces a Single Product,which It Sells for $8