Question

Break-Even Sales: Sales for Target Profit Health-Temp Company is a placement agency for temporary nurses. It serves hospitals and clinics throughout the metropolitan area. Health-Temp Company believes it will place temporary nurses for a total of 23,500 hours next year. Health-Temp charges the hospitals and clinics $90 per hour and has variable costs of $75.60 per hour (this includes the payment to the nurse). Total fixed costs equal $321,000.

Required:

1. Calculate the contribution margin per unit and the contribution margin ratio.

2. Calculate the sales revenue needed to break even.

3. Calculate the sales revenue needed to achieve a target profit of $100,000.

4. What if Health-Temp had target operating income (profit) of $110,000? Would sales revenue be larger or smaller than the one calculated in Requirement 3? Why? By how much?

Show computation please.

Answer 1

• All working forms part of the answer

A	Revenue per hour	$                                        90.00
B	Variable cost per hour	$                                        75.60
C=A-B [Answer 1]	Contribution margin per unit	$                                        14.40
D=C/A [Answer 1]	Contribution margin ratio	16%
E	Fixed Cost	$                            3,21,000.00
F=E/D [Answer 2]	Sales Revenue needed to Break EVen	$                          20,06,250.00
A	Fixed Cost	$                            3,21,000.00
B	Target Profit	$                            1,00,000.00
C=A+B	Total contribution required for target profit	$                            4,21,000.00
D [calculated above]	Contribution margin per unit	$                                        14.40
E=C/D	No. of hours required	29236.11111
F	Revenue per hour	$                                        90.00
E=E x F [Answer 3]	Revenue required for target profit	$                          26,31,250.00
A	Fixed Cost	$                            3,21,000.00
B	Target Profit	$                            1,10,000.00
C=A+B	Total contribution required for target profit	$                            4,31,000.00
D [calculated above]	Contribution margin per unit	$                                        14.40
E=C/D	No. of hours required	29930.55556
F	Revenue per hour	$                                        90.00
E=E x F [Answer 4]	Revenue required for target profit	$                          26,93,750.00

Revenue required under Answer 4 is GREATER than whats required in Answer 3 because the requirement for Target Profits have increased from $100,000 to $110,000