Current operating income for Bay Area Cycles Co. is $40,000. Selling price per unit is $100, the contribution margin ratio is 20%, and fixed expense is $160,000. Required: 1. Calculate Bay Area Cycle’s per unit variable expense and contribution margin. How many units are currently being sold?

Instructions are below.

Explanation:

Giving the following information:

Operating income=  $40,000.

Selling price per unit is $100

Contribution margin ratio= 0.20

Fixed expense is $160,000

First, we need to calculate the unitary variable cost. We can use the contribution margin ratio formula:

contribution margin ratio= (selling price - unitary variable cost) / selling price

0.2 = (100 - unitary variable cost) / 100

unitary variable cost= 80

Now, the contribution margin:

Contribution margin= 100 - 80= $20

Finally, the number of units being sold:

Total contribution margin= operating income + fixed costs

Total contribution margin= 40,000 + 160,000= 200,000

Unitary contribution margin= Total contribution margin/number of units

20= 200,000 / number of units

number of units= 200,000/20

number of units= 10,000 units