Monday, April 12, 2010

Contribution Margin Practice Problem

There is a manufacturing company that has total fixed costs for product A that are $ 23,400 per month. At the same time,  the variable cost per unit is determined to be $32 and the selling price is $45.

How many units of product A must the firm sell to generate $12000 per months in profits related to selling this product?

Accounting Answer:

Contribution Margin (CM) per unit = Sales Price Per unit (SPU) - Variable Cost per Unit =  $45 - $32 = $13

Sales unit = ( target profit + fixed cost ) / Contribution Margin (CM) per unit = ( 12000 + 23400 ) / 13 = 2723 units

2723 units of the product must be sold to meet this desired profit for the manufacturing company.

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