Contribution Margin – Short Answer

Practice Question

Intro to Managerial Accounting
Decision-Making: Cost-Volume-Profit Analysis
Contribution Margin Analysis
Short Answer

A company incurs a variable cost of $40 per unit and sells the product for $100. If the fixed costs are $200,000, how many units must be sold to achieve a profit of $50,000?

Answer +
Correct Answer: 6,250 units
Explanation +

Step 1: Identify key values – Fixed Costs = $200,000, Desired Profit = $50,000

Step 2: Contribution Margin per unit = Selling Price - Variable Cost = $100 - $40 = $60

Step 3: Required Sales Volume = (Fixed Costs + Desired Profit) ÷ Contribution Margin

(200,000 + 50,000) ÷ 60 = 250,000 ÷ 60 = 6,250 units