If a company has a contribution margin ratio of 40% and fixed costs of $50,000,
Practice Questions
Q1
If a company has a contribution margin ratio of 40% and fixed costs of $50,000, what is the sales revenue needed to achieve a target profit of $10,000?
$150,000
$100,000
$125,000
$200,000
Questions & Step-by-Step Solutions
If a company has a contribution margin ratio of 40% and fixed costs of $50,000, what is the sales revenue needed to achieve a target profit of $10,000?
Step 1: Understand the contribution margin ratio. It tells us what percentage of sales revenue contributes to covering fixed costs and generating profit. In this case, the contribution margin ratio is 40%, or 0.4.
Step 2: Identify the fixed costs. The fixed costs are the expenses that do not change with the level of sales. Here, the fixed costs are $50,000.
Step 3: Determine the target profit. This is the profit the company wants to achieve, which is $10,000 in this case.
Step 4: Calculate the total amount needed to cover both fixed costs and target profit. Add the fixed costs and target profit together: $50,000 + $10,000 = $60,000.
Step 5: Use the contribution margin ratio to find the required sales revenue. Since the contribution margin ratio is 40%, we can set up the equation: Required sales = Total amount needed / Contribution margin ratio.
Step 6: Plug in the numbers: Required sales = $60,000 / 0.4.
Step 7: Perform the calculation: $60,000 divided by 0.4 equals $150,000.
Step 8: Conclude that the sales revenue needed to achieve the target profit of $10,000 is $150,000.
Contribution Margin Ratio – The percentage of each sales dollar that contributes to covering fixed costs and generating profit.
Fixed Costs – Costs that do not change with the level of production or sales, which must be covered to achieve profitability.
Target Profit – The desired profit level that a company aims to achieve over a specific period.
Sales Revenue Calculation – The formula used to determine the necessary sales revenue to cover fixed costs and achieve target profit.
