Question

Cinnabar Corp. manufactures one product. Its total fixed costs calculated according to traditional cost-volume-profit (CVP) analysis and activity-based costing (ABC) equal $300,000 and $100,000, respectively. Unit selling price is $40, and unit-based variable cost per unit is $20. In addition, total cost also varies with one batch-level and one product-sustaining driver. Relevant information about nonunit-based drivers includes the following:

	Batch-Level	Product-
	Driver	Sustaining Driver
Cost per driver	$2,000	$60
Quantity of driver	40	2,000

Question

According to ABC analysis, how many units must be sold to generate operating income of $30,000?

Answer 1

since ABC analysis is used;

fixed cost	$100,000
batch level cost ($2,000 *40)	80,000
product level cost ($60*2000)	120,000
total	$300,000

Number of units to be sold to generate operating income of $30,000

=> (fixed cost + batch level cost + product level cost+ target profit) / (sale price per unit - variable cost per unit)

=>( $100,000+80,000+120,000+30,000) / (40-20)

=> (330,000 / 20)

=>16,500 units.