Here are data for Alliah Company:

• Total sales revenue: $250,000
• Number of units sold: 50,000
• Net income: $50,000
• Fixed costs: $100,000

What is the calculated number of units that Alliah must sell to generate a net income of $170,000?

• 90,000 units

  Correct!

• 120,000 units

• 75,000 units

  Incorrect.

• 105,000 units

The correct answer is calculated as follows:

With the information for Alliah Company, you can calculate the variable cost per unit, which you will need to calculate the target level of income. The current sales price must be $5 per unit or $250,000/50,000 units. At this level of sales, the company made $50,000, or $1 per unit sold.

The fixed costs were $100,000, which means that variable costs must have been $2 per unit because it took $2 per unit at a sales level of 50,000 units to cover the $100,000 of fixed costs. The contribution margin must therefore be $3 per unit. You can check this by calculating the profit as $250,000 in sales $100,000 fixed costs $100,000 variable costs ($2 50,000 units) = $50,000 profit. To achieve 170,000 in profit, Alliah Company would need to sell 90,000 units, calculated as $100,000 fixed costs plus $170,000 target income divided by contribution margin of $3, or $270,000/$3 = 90,000 units.

How did they come up with the contribution margin?