Corporation X sold 25,000 units of product last year. The contribution margin per unit was $2, and fixed expenses totaled $40,000 for the year. This year fixed expenses are expected to increase to $45,000, but the contribution margin per unit will remain unchanged at $2. How many units must be sold this year to earn the same net operating income as was earned last year?

Question

Quizplus · Accepted Answer

First, we need to calculate the net operating income earned last year:

Contribution margin = $2/unit x 25,000 units = $50,000
Net operating income = Contribution margin - Fixed expenses = $50,000 - $40,000 = $10,000

Next, we need to determine how many units must be sold this year to earn the same net operating income with the increased fixed expenses:

Net operating income = Contribution margin x Units sold - Fixed expenses
$10,000 = $2/unit x Units sold - $45,000
$2/unit x Units sold = $55,000
Units sold = $55,000/$2/unit
Units sold = 27,500

Therefore, 27,500 units must be sold this year to earn the same net operating income as was earned last year. Option B is the correct answer.

Corporation X Sold 25,000 Units of Product Last Year