Downs Co sells a single product for $20 per unit. Fixed costs are $85 000 and variable costs equal 60% of sales. If fixed costs increase by $20 000, Downs Co will have to increase sales by how much just to earn profits equal to those earned before costs increased?

Question

Quizplus · Accepted Answer

To maintain the same profit level after a $20,000 increase in fixed costs, Downs Co needs to cover this additional cost. With a contribution margin of 40% ($20 - 60% of $20), the company needs to generate $50,000 more in sales ($20,000 / 0.4) to cover the increased fixed costs.

Downs Co Sells a Single Product for $20 Per Unit