ITPEC FE Subject A October 2024 Question 59
ITPEC FE Subject A October 2024 — Question 59 of 60
Find units needed to cover fixed costs and earn a desired profit.
Contribution margin per unit:
- Price = $50, variable cost ratio = 60%
- Variable cost per unit = $50 × 0.60 = $30
- Contribution margin = $50 - $30 = $20
Target units formula:
Units = (Fixed Costs + Target Profit) / Contribution Margin
Units = ($100,000 + $50,000) / $20 = 7,500
Why not others:
- (a) 5,000 — covers only fixed costs ($100,000), no profit
- (c) 10,000 — generates $100,000 profit, twice the target
- (d) 12,500 — far exceeds target profit
Key rule: Units = (Fixed Costs + Target Profit) ÷ (Price × (1 − Variable Cost Ratio))
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