A product line offered by Universal Company sells for an average of $20 per unit with a weighted average variable cost per unit of $5.00. Fixed costs assigned to this product line are $3,600,000 and the target before-tax profit goal for this product line is $1,200,000. How many units does Universal need to sell to achieve the target before-tax profit?
A) 160,000
B) 180,000
C) 240,000
D) 320,000
E) none of the above
To determine how many units Universal Company needs to sell in order to achieve the target before-tax profit of $1,200,000, we can use the contribution margin approach. The contribution margin is the difference between the selling price per unit and the variable cost per unit. It represents the amount available to cover fixed costs and contribute towards profit.
Here are the relevant figures:
Selling price per unit = $20 Variable cost per unit = $5 Fixed costs = $3,600,000 Target before-tax profit = $1,200,000
First, let’s calculate the contribution margin per unit:
Contribution Margin per Unit = Selling Price per Unit – Variable Cost per Unit Contribution Margin per Unit = $20 – $5 = $15
Now, we can use the contribution margin to calculate the number of units needed to achieve the target profit:
Number of Units = (Fixed Costs + Target Profit) / Contribution Margin per Unit Number of Units = ($3,600,000 + $1,200,000) / $15 Number of Units = $4,800,000 / $15 Number of Units = 320,000
Therefore, Universal Company needs to sell 320,000 units to achieve the target before-tax profit of $1,200,000.
The correct answer is D) 320,000 units.
In summary, by calculating the contribution margin and using it in the formula to cover fixed costs and achieve the target profit, Universal Company should aim to sell 320,000 units of the product line to meet its financial goals.
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