If variable costs per unit are 70% of sales, fixed costs are $290,000 and target net...

If variable costs per unit are 70% of sales, fixed costs are $290,000 and target net income is $70,000, required sales are $1,200,000

I know the answer is true but I don't know how/why. Can you please show your calculation? Thank you

Expert Solution

Sales revenue required to Earn $70,000
A	Target profit	$ 70,000.00
B	Fixed expenses	$ 290,000.00
C=A+B	Total contribution margin required	$ 360,000.00
D	Contribution margin ratio	30%
E=C/D	Sales revenue required to Earn $70,000	$ 1,200,000.00

What we are doing in here is we are considering required profit equal to Contribution.

Contribution is amount left after variable cost (Sales-Variable cost=Contribution)

Since variable cost is 70% it means Contribution margin is (100-70) 30%

So 30% of contribution is earned on every sales volume. Total contribution required is $360000 that is Total fixed cost +Target profit.

Since $360,000 is equal to 30% we just need to know what would 100% amount be. 100% amount is sales revenue.

Sales revenue to earn $360000= $360000/30 x 100=$1,200,000

ekkarill92 answered 2 years ago

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