Austin Manufacturing had the following operating data for the year just ended.
Management plans to improve the quality of its only product by: (1) replacing a component that costs $3.50 with a higher-grade component that costs $5.50; and (2) renting a packing machine for $18,000 a year. If the desired target profit is $288,000, the company must sell:

Question

Austin Manufacturing had the following operating data for the year just ended. 
Management plans to improve the quality of its only product by: (1) replacing a component that costs $3.50 with a higher-grade component that costs $5.50; and (2) renting a packing machine for $18,000 a year. If the desired target profit is $288,000, the company must sell:

Quizplus · Accepted Answer

Step 1: Calculate the current contribution margin per unit:
Sales price per unit - Variable costs per unit
= $74.00 - $40.50
= $33.50

Step 2: Calculate the contribution margin per unit after the proposed changes:
Sales price per unit - Variable costs per unit
= $74.00 - ($37.00 + $5.50)
= $31.50

Step 3: Calculate the break-even point in units:
Fixed costs / Contribution margin per unit
= ($1,350,000 + $18,000) / $33.50
= 40,596 units

Step 4: Calculate the target sales in units:
(Target profit + Fixed costs + Extra costs) / Contribution margin per unit
= ($288,000 + $1,350,000 + $18,000) / $31.50
= 22,500 units

Therefore, the company must sell 22,500 units to achieve a target profit of $288,000 after the proposed changes. The correct answer is C.

Austin Manufacturing Had the Following Operating Data for the Year