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For one of its divisions, Buona Fortuna Company has fixed costs of $300,000 and a variable-cost percentage equal to 60% of its $10 per unit selling price. It would like to earn a pre-tax income of $90,000 per year from the division. How many units will Buona Fortuna have to sell to earn a pre-tax income of $90,000 per year?
Suggested Answer: B
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A common misstep in regard to capital budgeting is the temptation to gauge the desirability of a project by using accrual accounting numbers instead of cash flows. Net income and book value are affected by the compas choices of accounting methods. A project's true rate of return cannot be dependent on bookkeeping decisions. Another distortion inherent in comparing a single project's book rate of return to the current one for the company as a whole is that the latter is an average of all of a firm's capital projects. Embedded in that average number 'may be a hand Full of good projects melding up for a large number of poor investments.
35 comments · newest first
AJ
Aja
10 months ago
Totally agree, 75,000 sounds right!
AL
Alisha
11 months ago
Wait, are we sure about those numbers? Seems off.
BR
Brigette
11 months ago
I think it's around 75,000 units.
IN
In
11 months ago
60% variable cost means $6 cost per unit.
CA
Carmelina
11 months ago
Fixed costs are $300k, selling price is $10.
CA
Carry
12 months ago
I feel like I might be overthinking this. I just need to set up the equation correctly to find the number of units needed for that income.
BE
Bea
12 months ago
I think the variable cost is 60% of $10, which means it's $6 per unit. So the contribution margin would be $4, right?
AR
Arminda
12 months ago
This seems similar to a practice question we did about fixed and variable costs. I think I need to calculate the contribution margin first.
KE
Keneth
1 year ago
I remember we calculated break-even points in class, but I'm not sure how to factor in the desired income here.
MA
Maxima
1 year ago
I feel pretty confident about this one. I'll start by calculating the contribution margin per unit, then use that to find the number of units needed to reach the $90,000 pre-tax income target.
TU
Tuyet
1 year ago
This seems tricky. I'm going to need to review my notes on break-even analysis and contribution margin to make sure I'm doing this right.
ME
Mertie
1 year ago
Okay, I think I've got this. We need to find the contribution margin per unit, then use that to calculate the number of units needed to reach the target pre-tax income.
VE
Verona
1 year ago
Hmm, I'm a little unsure about how to approach this. The variable costs and fixed costs are given, but I'm not sure how to use that information to find the number of units.
SE
Sean
1 year ago
This looks like a straightforward break-even analysis problem. I think I can work through this step-by-step.
KA
Kassandra
1 year ago
The border gateway is a term I've heard, but I'm not sure how it fits in here. I might be mixing it up with border leaf, which I think is actually the correct answer.
KR
Kristine
1 year ago
This question is a real 'buona fortuna' (good luck) for the exam takers. Option C looks like the way to go, but I'd recommend showing your work just in case.
AH
Ahmed
1 year ago
Wait, does Buona Fortuna sell fortuna cookies? If so, I'd buy a whole truckload to increase my chances of getting the right answer. But seriously, Option C seems legit.
NA
Nada
1 year ago
Let's go with Option C then.
ES
Esteban
1 year ago
I'm not sure, but Option C does sound like a good choice.
TA
Tamra
1 year ago
Yeah, I agree. Option C seems to make sense.
RA
Rashad
1 year ago
I think Option C is the correct answer.
TO
Tommy
1 year ago
Haha, Buona Fortuna? I hope the company lives up to its name with this calculation. Option C seems right, but I'd double-check my work just to be sure.
MA
Martina
1 year ago
I'm a bit confused by the variable-cost percentage. Shouldn't we be using the contribution margin instead to find the breakeven point and then add the desired pre-tax income?
SI
Simona
1 year ago
After calculating the contribution margin, we can then use it to find the number of units needed to earn the desired pre-tax income.
CH
Chantell
1 year ago
So, the contribution margin would be 40% ($10 selling price - 60% variable cost).
JI
Jin
1 year ago
Yes, you are correct. We can use the contribution margin to find the breakeven point and then add the desired pre-tax income.
RE
Reuben
1 year ago
User 3: The answer options are 65,000 units, 75,000 units, 77,250 units, and 97,500 units.
GL
Glenna
1 year ago
User 2: I think we should use the contribution margin to find the breakeven point first.
KA
Kassandra
1 year ago
User 1: We need to calculate the number of units to earn $90,000 pre-tax income.
LA
Launa
1 year ago
Option C looks like the correct answer. The calculation to find the required units seems straightforward, considering the fixed costs, variable costs, and desired pre-tax income.
GE
German
1 year ago
Yes, that makes sense. The calculation is pretty straightforward.
JE
Jesusita
1 year ago
I think the answer is C) 77,250 units.
RO
Rory
2 years ago
I'm not sure, but I think the answer might be D) 97,500 units.
TO
Toi
2 years ago
I disagree, I calculated it and I believe the answer is C) 77,250 units.
GR
Grover
2 years ago
I think the answer is B) 75,000 units.