target systems inc makes heat seeking missiles 544667

Contribution Margin and Profit Planning

Target Systems, Inc., makes heat-seeking missiles. It has recently been offered a government contract from which it may realize a profit. The contract purchase price is $130,000 per missile, but the number of units to be purchased has not yet been decided. The company’s fixed costs are budgeted at $3,973,500, and variable costs are $68,500 per unit.

1. Compute the number of units the company should agree to make at the stated contract price to earn a profit of $1,500,000.

2. Using a lighter material, the variable unit cost can be reduced by $1,730, but total fixed overhead will increase by $27,500. How many units must be produced to make $1,500,000 in profit?

3. Given the figures in 2, how many additional units must be produced to increase profit by $1,264,600?