 Hello and welcome to the session in which you would look at a CPA exam question that deals with how many units a company needs to sell to earn a 10% return. I like this question because initially it looks intimidating but it's going to illustrate the concept that I always try to tell you about. The CPA exam tests your basic knowledge. What does that mean? It means if you know your basic accounting formulas and I mean by basic introductory accounting formulas you should be able to answer most questions on the exam and that's the purpose I want to go over this question. Two, I'm going to show you two methods and how you solve this problem. One is the GMAT method and one is the accounting the CPA method. So I just want to make sure you understand that you have more one way on tackling a problem like this. And this concept is really tested in a managerial accounting basic accounting course. Even if you're not an accounting major you should be able to solve this problem as long as you did well in your managerial accounting course. So whether you are an accounting student or a CPA candidate I strongly suggest you take a look at my website farhatlectures.com. I don't replace your CPA review course. I am a useful addition to your CPA course. The difference between what I do and your CPA review course is the following. The CPA review course is simply a review course. It reviews the material with you. I teach you the material. So if you don't know the material you will find hard time taking advantage of your review course. So this is how I can help. I can help you clarify it, give you more examples, give you the journal entries, give you the theory behind it. So when Peter Alinto or Roger or Wiley gives you the shortcut, well it makes sense to you. Your risk with me is one month of subscription. Your potential gain is passing the exam. 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The expecting selling price is $30. We have variable manufacturing cost, variable selling, fixed manufacturing, advertising and product design. And let me rate the numbers because I know some of my some of my viewers are blind. Variable manufacturing cost is $20, variable selling is $4, fixed manufacturing is $50,000, advertising cost is $50,000, product design is $50,000. And Adam wants to earn 10% return on this operation. They expect this dinosaur to sell for a year and after a year they will cease this product. So how many units will Adam need to sell to earn 10%? Now do you know what 10% is? How do we compute the 10%? Well the 10% is rate of return. It means you have to earn, your profit has to be 10% relative to sales. So when you take your profit divided by sales it should give us 10%. So as I said at the beginning I'm going to show you how to solve this problem in two different ways. And it relies on your basic knowledge of a basic formula you would learn in managerial accounting which is the variable income statement. What is the variable income statement? Well we're going to have to take sales minus variable cost will give us contribution margin then if you deduct your fixed cost you're going to get your profit. Simply put you're going to take the profit divided by sales and the answer that's going to give you 10% that is your answer. Now what you can do is the GMAT way is to kind of okay if you know that your formula try it out take a look at some numbers and see how it works. Well let's do it the GMAT way. Well your selling price let me just come in also kind of condense this formula a little bit further kind of as a review for you because this is this is what I'm trying to do. Selling price minus variable cost per unit equal to the contribution margin. So the selling price is 30 dollars you have variable cost of 24 minus 24 equal to six dollars. So simply put your contribution margin is six dollars per unit and what you do now is if my contribution margin is six dollars per unit pick a number pick 60 pick 80 I'm going to pick 60 I'm going to pick 60 dollars. So if I am if I'm making six dollars per unit and I'm going to just randomly pick 60,000 and I'm going to multiply it by 60,000 that's my contribution it's going to give me by contribution margin. I can also do sales you know take 60,000 times 30 dollars I can take 60,000 unit times 30 dollars 60,000 unit times 24 dollars then subtract them or I just computed the contribution margin per unit I just want to make sure to show you the different ways. So if you take six six dollars contribution margin times 60,000 and that's going to give us 360,000 360,000 now our fixed cost fixed manufacturing cost advertising is a fixed cost product and design development is a fixed cost fixed cost is 180 360 minus 180 will give us profit of 180. Now what we have to do is look at our profit and look at our total sales if we're selling 60,000 unit 30 dollars a piece that's going to give us 1.8 million dollar in sales. Well guess what I happen to choose that number and it happens to be 10 so if I take 180,000 divided by 1.8 million that's going to give me exactly 10% and that's my answer so 60,000 dollar is my answer and how did I solve this I solved this by just picking it knowing my variable income statement and picking a number so that's one way to do it I'm not saying this is the way to do it that's one way to do it I'm going to show you how to do it relying on your knowledge of the variable income statement which is this is the variable income statement which is you have to know by heart when you sit for the exam because the variable income statement remember it's going to help you in the CVP analysis any CVP analysis if you have a good foundation of the variable income statement you can work with that okay let's work basically the accounting way or the algebra way let's call it the accounting way the algebra way so the profit we don't know what the profit is we know that sales profit relative to sales we know sales is 30 dollars per unit so sales is 30 Q 30 dollars times the quantity profit divided by 30 Q it should give us 10% or 0.1 0.1 or 1% now we can solve for profit if we solve for profit so profit cross multiply profit equal to 3 Q all we did is we cross multiply so now we have profit equal to 3 Q again back to the back to the formula back to the variable income statement formula and if you're not comfortable with the variable income statement formula this is what I do in my managerial accounting this is what I do in my constant accounting course this is what I do in my CPA review course I cover the this formula in the tails on the CPA review course they may spend three to five minutes on this formula I spent maybe literally maybe three hours in terms of exercises and lectures so by the time you're done with this you'll be fully fully know this inside out including the CVP analysis so basically what it boils down to is something like this again we know the contribution margin so let's let's do this let's let's I'm going to walk you through the formula step by step so we know 30 Q minus 24 Q equal to 6 Q so we know our contribution margin should be 6 Q 6 times quantity minus the fixed cost we know the fixed cost is 180 000 altogether and the profit should be 3 Q now it's easy now we can solve the formula 6 Q minus 6 times the contribute six dollars contribution margin times the quantity sold which is we don't know we're solving for minus the fixed cost equal to 3 Q 3 Q is 10 percent which is sale I'm sorry as m 3 Q is the profit which should be which should be our profit right here the profit should be 3 Q now we solve for Q 6 Q we're going to subtract 3 Q on both sides so it's going to be 3 Q equal to 180 we're going to be 3 Q we're going to subtract 3 Q both from both sides and add 180 on both sides 3 Q equal to 180 now Q equal to 180 divided by 3 Q equal to 60 000 we're back to the same answer 60 000 show so I showed you how to solve this in two different ways obviously on the CPA exam it should not take you this long real quick you need to know this by hard you need to know this formula by heart again you can use the GMAT if you're really good at that say okay let me plug this number in the formula and see if it gives me profit will give me 10% or you can solve it well using this algebra algebra formula and you'll be able to do it so it should not take you long although at the beginning the question looks a little bit intimidating but again it boils down to do you know your basics and this is what I keep emphasizing on for the CPA exam you need to if you have strong basics you should be fine but if you don't have strong basics even if you know the advanced topics a little bit more in details it's not going to help you because the exam test your basic knowledge test it in a challenging way though although it's a challenge and so if you know if you know the basics you can do it if you know the basics you can be you can get lost very quickly at the end of this recording once again I'm going to invite you to take a look at my website farhatlectures.com again I don't replace your CPA review course that's not what I do I am an adjunct I'm a helper I assist you in understanding the material better the CPA exam is a lifetime investment don't shortchange yourself you pass the exam once throw everything on it 30 dollars it's not going to break you you try it for a month you like it you keep it if it's feel it's helping you you keep it if you don't feel it's helping you if it's if you feel it it's really uh rather than helping you it's hurting you contact me I would refund your money if that's the case study hard good luck the CPA is worth it and most importantly stay safe