Question

In: Accounting

Jasmine Inc. makes a single product that it sells for $25 each. Variable costs are $13...

Jasmine Inc. makes a single product that it sells for $25 each. Variable costs are $13 per unit and annual fixed costs total $30,000 per year. The company would like to realize operating income next year of $60,000. What level of sales in dollars must the company achieve to reach its target profit?

Expert Solution

Solution:

The formula for calculating the level of sales in dollars the company must achieve to reach its target profit is :

= ( Annual Fixed costs + Operating Income ) / Contribution margin ratio

Where

Contribution margin ratio = ( Selling price per unit – Variable cost per unit ) / Selling price per unit

Calculation of Contribution margin ratio :

The formula for calculating the contribution margin ratio is

= ( Selling price per unit – Variable cost per unit ) / Selling price per unit

As per the information given in the question we have

Selling price per unit = $ 25 ; Variable cost per unit = $ 13

Applying the above information in the formula for contribution margin ratio we have

= ( $ 25 - $ 13 ) / $ 25

= $ 12 / $ 25

= 0.48

= 48 %

Thus the contribution margin ratio = 0.48 = 48 %

Calculation of the level of sales in dollars the company must achieve to reach its target profit:

As per the information available in the question we have

Annual Fixed costs = $ 30,000 ; Operating Income = $ 60,000 ; Contribution margin ratio = 0.48

The formula for calculating the level of sales in dollars the company must achieve to reach its target profit is

= ( Annual Fixed costs + Operating Income ) / Contribution margin ratio

Applying the above information in the formula we have

= ( $ 30,000 + $ 60,000 ) / 0.48

= $ 90,000 / 0.48

= $ 187,500

Thus the level of sales in dollars the company must achieve to reach its target profit = $ 187,500

ekkarill92 answered 1 year ago

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