Question

Ten Toes produces sport socks. The company has fixed expenses of $85,000 and variable expenses of $1.20 per package. Each package sells for $2.00. The number of packages Ten Toes needed to sell to earn a $26,000 operating income was 138,750 packages. If Ten Toes can decrease its variable costs to $1.10 per package by increasing its fixed costs to $100,000, how many packages will it have to sell to generate $26,000 of operating income? Is this more or less than before? Why? Begin by identifying the formula to compute the sales in units at various levels of operating income using the contribution margin approach. Five Fixed expenses + Operating income ). Contribution margin per unit = Sales in units (Round your answer up to the nearest whole unit.) Ten Toes will have to sell packages to generate $26,000 of operating income.

Answer 1

	Selling Price		$             2.00
	Variable cost		$             1.10
	Contribution Margin		$             0.90
	Fixed Cost		$ 100,000.00
	No. of units needed to sell to earn desired profit
	of $ 26000 would be :
	(Fixed Cost + Desired profit) / Contribution Margin per unit
=	($ 100000 + $ 26000) / $ 0.9
=	140000	units

Ten toes would have to sell 1250 more packages of socks to eard $ 26000 operating income.

The increase in fixed cost was not completely offset by the decrease in variable costs at the prior

target profit volume of sales. Therefore, Ten Toes will need to sell more units in order to achieve

its target profit level.