Vaughn Manufacturing, a company specializing in the production of small lightweight camping trailers with rear kitchen facilities, aims to determine the number of campers it must sell to achieve a net income of $183,000. This analysis involves considering fixed costs, variable costs, and the selling price per unit to arrive at the desired sales volume.
Fixed costs are the expenses that remain constant regardless of the level of production. In this case, Vaughn Manufacturing’s fixed costs amount to $870,000 annually. These costs encompass expenses such as rent, insurance, and salaries, which do not change with fluctuations in production.
Variable costs, on the other hand, are directly tied to the level of production. For Vaughn Manufacturing, variable costs are calculated as 70% of the unit selling price, which is $15,000 per camper. Variable costs cover expenses like materials, labor, and utilities, which increase as production levels rise.
To calculate the contribution margin, we need to subtract variable costs per unit from the selling price per unit. In this case, the contribution margin per camper can be computed as follows:
Contribution Margin per Camper = Selling Price per Camper – Variable Cost per Camper Contribution Margin per Camper = $15,000 – (0.70 * $15,000) Contribution Margin per Camper = $15,000 – $10,500 Contribution Margin per Camper = $4,500
To achieve a net income of $183,000, Vaughn Manufacturing needs to cover both its fixed costs and the desired profit through its contribution margin. The formula to calculate the required sales volume (Q) can be expressed as:
Q = (Fixed Costs + Desired Profit) / Contribution Margin per Camper Q = ($870,000 + $183,000) / $4,500 Q = $1,053,000 / $4,500 Q ≈ 234 campers
In conclusion, Vaughn Manufacturing must sell approximately 234 campers to achieve a net income of $183,000. This calculation takes into account their fixed costs, variable costs as a percentage of the selling price, and the contribution margin per camper. By reaching this sales volume, the company can meet its financial goals while covering all its costs and generating the desired profit. Effective financial planning and analysis are crucial for businesses like Vaughn Manufacturing to make informed decisions and work toward their profitability objectives.
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