There is a company that manufactures toilet and sells its product for $20 per vase. The companies variable cost ratio is 60% and it has fixed costs that total $32,000. If fixed costs increase by 40% this year, how many more units is the company required to sell in order to generate the same operating income as under the current operating conditions?
Variable Cost Percent = Variable Cost/Sales Revenue
VC% = VC/SR
60% = VC/20
Variable Costs (VC) = 12
CM = SR – VC
CM = 20 – 12
Contribution Margin (CM) = 8
Increase in Fixed Costs (FC) = $32,000 x .4 = 12,800
12,800/8 = 1,600 more toilets are needed to be produced
Additional Accounting Examples:
Difference between Fixed Cost and Variable Cost
Relationship between Variable and Absorption Costing
Applying Manufacturing Overhead
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