Question

Yoda and his Jedi Knights, have just received a project to produce a new Pink Lightsaber. The variable cost per unit is at $750, the sales price would be set at twice the VC/unit, and the fixed costs are $1,000,000. The Storm Troopers have agreed that they will put up the funds if the project is likely to have an operating income of $500,000 or more. What amount of sales would be needed in order to meet this profit goal?

Answer 1

Target sales to achieve such target income is $ 15,00,000 or more.

Working:

Step-1:Calculation of contribution margin ratio
Contribution margin ratio	=	Contribution margin	/	Sales
	=	$                   750	/	$    1,500
	=	50%
Working:
Sales	=	Variable cost *2
	=	750*2
	=	$                1,500
Contribution margin	=	Sales price per unit	-	Variable cost per unit
	=	$                1,500	-	$        750
	=	$                   750
Step-2:Calculation of target sales
Target sales	=	Target contribution margin / Contribution margin ratio
	=	$       15,00,000	/	50%
	=	$       30,00,000
Working:
Fixed cost		$       10,00,000
Target profit		$          5,00,000
Target contribution margin		$       15,00,000