Question

Ibhar Manfacturing Company has fixed cost of $3,000,000 and variable costs are 40% of sales. What are the required sales if Ibhar desires net income of $300,000?

a. $5,000,000

b. $5,500,000

c. $8,250,000

d. $7,500,500

Answer 1

• To Calculate what the question requires, we must first know what is the contribution margin ratio.
• Contribution margin ratio = 100% - Variable cost % to sale = 100% - 40% = 60%
• The amount to be covered by Contribution margin = Fixed cost PLUS desired Net Income

= $ 3,000,000 + $ 300,000

= $ 3,300,000

• Required sale to earn the desired Net Income = $ 3,300,000 / 60%

= $ 5,500,000

• Hence, Correct Answer = Option ‘B’ $ 5,500,000
• Verification:

Working		Option 'a'	Option 'b'	Option 'c'	Option 'd'
A	Sales	$                 5,000,000	$          5,500,000	$          8,250,000	$        7,500,500
B = A x 40%	Variable Cost	$                 2,000,000	$          2,200,000	$          3,300,000	$        3,000,200
C = A - B	Contribution margin	$                 3,000,000	$          3,300,000	$          4,950,000	$        4,500,300
D	Fixed Cost	$                 3,000,000	$          3,000,000	$          3,000,000	$        3,000,000
E = C - D	Net Income	$                                -	$             300,000 [Matches the desired Net Income asked in question]	$          1,950,000	$        1,500,300