Gail Co sells a single product for $40 per unit.Fixed costs are $160 000 and variable costs equal 75% of sales.If fixed costs increase by $10 000,Gail will have to increase sales by how much just to earn profits equal to those earned before costs increased?

Question

Quizplus · Accepted Answer

First, let's find the current profit by using the contribution margin approach:
Selling price = $40
Variable cost = 75% x $40 = $30
Contribution margin = $40 - $30 = $10
Total profit = Sales x Contribution margin - Fixed cost
At breakeven, profit is zero, so:
0 = Sales x $10 - $160,000
Sales = $16,0000 / $10 = 16,000
Now, let's calculate the new breakeven point:
New fixed cost = $160,000 + $10,000 = $170,000
0 = Sales x $10 - $170,000
Sales = $170,000 / $10 = 17,000
The increase in sales needed to earn the same profit as before is:

17,000 - 16,000 = $1,0000 or Choice B) $40,000

Therefore, the correct choice is B) $40,000.

Gail Co Sells a Single Product for $40 Per Unit