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3 February, 20:06

In 2016, Raleigh sold 1,000 units at $500 each, and earned net income of $40,000. Variable expenses were $300 per unit, and fixed expenses were $160,000. The same selling price is expected for 2017. Raleigh's variable cost per unit will rise by 10% in 2017 due to increasing material costs, so they are tentatively planning to cut fixed costs by $10,000. How many units must Raleigh sell in 2017 to maintain the same income level as 2016?

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  1. 3 February, 20:28
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    1,118 units.

    Explanation:

    The computation of number of units to be sold is shown below:-

    For the Year 2016

    Number of Units Sold = 1,000 units

    Unit selling price = $500 per unit

    Total Sales = $500 * 1,000 = $500,000

    Variable Costs = $300 * 1,000

    = $300,000

    Contribution = $500,000 - $300,000

    = $200,000

    Fixed Costs = $160,000

    Net Income = $200,000 - $160,000

    = $40,000

    For the Year 2017

    Unit Selling Price = $500 per unit

    Unit Variable Cost = $300 * 1.10

    = $330 per unit

    Contribution per unit = $500 - $330 = $170 per unit

    Fixed Cost = $160,000 - $10,000 = $150,000

    Now, to maintain the same income of $ 40,000 the Company have a total contribution

    $150,000 + $40,000

    = $190,000

    Number of units to be sold = Total contribution : Contribution per unit

    = $190,000 : $170

    = 1,117.64

    or

    1,118 units.
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