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Pippa's Pilot Headware, Inc
Pippa's Pilot Headware, Inc. produces pilot headware. Sales have been very erratic, with some months showing a profit and some moths showing a loss. The company's contribution format income statement for the most recent month is given below: Sales (15,000 units at $85 per unit) Variable expenses Contribution Margin Fixed expenses Net operating Income 1.275.000 840,000 435,000 270,000 165,000 Required: Refer to the original data. The company's advertising agency thinks that a new package would help sales. The new package being proposed would increase packaging costs by adding $13.00 per unit. Assuming no other changes, how many units would have to be sold monthly to earn a target profit of $225,000? (Round to 2 decimal places)
Expert Solution
Dear Student,
I tried to make solution to make you understood the concept. Please like the solution.
Break Even Point = Fixed Expenses / Contribution per unit
Break even point is the point where you would earn no profit no loss. Contribution per unit is Sale price per unit less variable expense per unit. In other words you have to sell that much of units so that you would recover Fixed Expenses.
If you want to earn specific amount of profit, you have to add that amount in Fixed Expenses then formulae will be
No. of units to be sold to earn Profit X = (Fixed Expenses + Profit X) / Contribution per unit
I hope concept is clear. Now lets solve the question:
Fixed Expenses = $270,000
Profit to be earned = $225,000
Sell price per unit = $ 85
Old Variable cost per unit = $ 840,000 / 15000 = $ 56
Revised Variable cost per unit = $ 56 + $ 13 = $ 69
Revised Contribution per unit = $ 85 - $ 69 = $ 16
No. of units to be sold to earn $ 225,000 monthly = (270,000 + 225,000) / 16 = 30,937.50 units (round off to 2 decimals)
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