Sinclair Company's single product has a selling price of $25 per unit. Last year the company reported a profit of $20,000 and variable expenses totaling $180,000. The product has a 40% contribution margin ratio. Because of competition, Sinclair Company will be forced in the current year to reduce its selling price by $2 per unit. How many units must be sold in the current year to earn the same profit as was earned last year

The correct answer is 15,000 units.

Explanation:

Sales Percent = 100 - CMR

= 100 - 40% = 60%

Sales = (Variable Expenses : Sales Percent)

= ($1,80,000 : 60 * 100)

=$3,00,000

Contribution Margin Ratio (CMR) = Sales - Variable Cost

= $3,00,000 - $1,80,000

=$1,20,000

Fixed cost = Contribution Margin - Profit

= $1,20,000 - 20,000

=$1,00,000

Current Year Contribution Margin = Reduced Selling Price - (Selling Price Per Unit * Sales Percent)

= $23 - ($25 * 60%) = $8

Number of Units to be Sold = Contribution Margin + Profit : Contribution Margin Per Unit

= $1,00,000 + $20,000 : $8

= $1,20,000 : $8

= 15,000 units

According to the Analysis, 15,000 units must be sold in the current year.