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1)Company X sells product A
1)Company X sells product A. Unit sales revenue of product A is 5 TL. Total fixed cost of Company X is 900.000 TL Contribution margin ratio for product A is %60. Required: Calculate the revenue to be earned in order to yield an operating income of 120.000 TL. Use Contribution Margin method.
2) Company A is considering two options with the following data: Option I USR -18 TL UVC -16 TL TFC -2.000.000 TL Option II USR - 18 TL UVC - 14 TL TFC -6.000.000 TL Required: a) At what sales volume Company A is indifferent between two alternatives? Explain which alternative is better? 1
Expert Solution
1)Selling price per unit = 5TL
Total fixed cost = 900,000 TL
Contribution margin ratio = 60%
Target income = 120,000 TL
Sales revenue to earn target profit = (Total fixed cost + Target profit)/Contribution margin ratio
= (900,000 + 120,000)/60%
= 1,020,000/60%
= 1,700,000 TL
Hence, revenue to be earn target profit of 120,000 TL = 1,700,000 TL
2)
Given
| Option I | Option II |
| USR - 18 TL | USR - 18TL |
| UVC - 16TL | UVC - 14TL |
| TFC - 2,000,000 | TFC - 6,000,000 |
Required Indifference between two alternatives and better option
Indifference point = Difference in Fixed cost / Difference in Variable cost per unit
= (6,000,000 - 2,000,000) / (16-14)
= 2,000,000 units
Company A is indifferent when sales volume is 2,000,000 units.
When sales volume is less than indifference Point (i.e less than 2,000,000 units ) then Option I is best.
(reason being - Option I is having lower fixed cost and higher variable cost).
When sales volume is more than indifference point (i.e more than 2,000,000 units) then option II is best.
(reason being - Option II is having higher fixed cost and lower varible cost)
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