Locus Company has total fixed costs of $112,000. Its product sells for $35 per unit and variable costs amount to $25 per unit. Next year Locus Company wishes to earn a pretax income that equals 10% of fixed costs. How many units must be sold to achieve this target income level?

12,320 units

Explanation

First we have to determine the target profit.

Desired Profit = $112,000 x 10% = $11,200

Now we will calculate the contribution margin which is a net value of selling price and variable cost.

Contribution margin = Sales - Variable cost

Contribution margin = $35 - $25

Contribution margin = $10 per unit

Formula for target sales is as follow

Target Sales = ( Fixed cost + Target profit ) / Contribution margin

Target Sales = ( $112,000 + $11,200 ) / $10

Target Sales = $123,200 / $10 = 12,320 units

12,320

Explanation:

First, you have to find the 10% of the fixed costs:

$112,000*10%= $11,200

Now, you need to find the amount of units that multiply for the price that is $35 minus the costs would give a pretax income of $11,200:

Income= Sales-Fixed Costs-Variable costs

11,200=(35*Q)-112,000-(25*Q), Q= quantity of products sold

11,200+112,000= 35Q-25Q

123,200=10Q

Q=123,200/10

Q=12,320

The number of units that must be sold to achieve this target income level is 12,320.

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