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Financial & Managerial Accounting
Found in: Page 834
Financial & Managerial Accounting

Financial & Managerial Accounting

Book edition 7th
Author(s) John J Wild, Ken W. Shaw, Barbara Chiappetta
Pages 1096 pages
ISBN 9781259726705

Short Answer

Zhao Co. has fixed costs of $354,000. Its single product sells for $175 per unit, and variable costs are $116 per unit. Compute the level of sales in units needed to produce a target (pretax) income of $118,000.

The business entity needs sales of 8000 units to achieve the target income of $118,000.

See the step by step solution

Step by Step Solution

Step 1: Definition of Break-Even Units

The number of units that a business entity must sell to achieve the situation of no-profit, no-loss is known as break-even units. It is determined using the fixed cost and the contribution margin per unit.

Step 2: Sales needed to generate desired profit

Most popular questions for Business-studies Textbooks

Rivera Co. sold 20,000 units of its only product and incurred a $50,000 loss (ignoring taxes) for the current year, as shown here. During a planning session for year 2018’s activities, the production manager notes that variable costs can be reduced 50% by installing a machine that automates several operations. To obtain these savings, the company must increase its annual fixed costs by $150,000. The maximum output capacity of the company is 40,000 units per year.


Contribution Margin Income Statement

For Year Ended December 31, 2017



Variable costs


Contribution margin


Fixed cost


Net loss



1. Compute the break-even point in dollar sales for year 2017.

2. Compute the predicted break-even point in dollar sales for year 2018 assuming the machine is installed and no change occurs in the unit selling price. (Round the change in variable costs to a whole number.)

3. Prepare a forecasted contribution margin income statement for 2018 that shows the expected results with the machine installed. Assume that the unit selling price and the number of units sold will not change, and no income taxes will be due.

4. Compute the sales level required in both dollars and units to earn $200,000 of target pretax income in 2018 with the machine installed and no change in unit sales price. (Round answers to whole dollars and whole units.)

5. Prepare a forecasted contribution margin income statement that shows the results at the sales level computed in part 4. Assume no income taxes will be due.


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