ITPEC FE Morning April 2018 Question 78
ITPEC FE Morning April 2018 — Question 78 of 80
Break-even analysis with target profit — finding minimum sales revenue to achieve a profit goal.
To find the minimum sales revenue:
- Contribution margin per unit = Selling Price − Variable Cost = $40 − $28 = $12
- Total amount to cover = Fixed Cost + Target Profit = $42,000 + $36,000 = $78,000
- Units needed = $78,000 ÷ $12 = 6,500 units
- Sales revenue = 6,500 × $40 = $260,000
Why not the others:
- a) 3,500: Units to cover only fixed cost ($42,000 ÷ $12), ignores target profit
- b) 6,500: This is the number of units, not sales revenue — a common trap
- c) 140,000: Revenue to cover only fixed cost (3,500 × $40), ignores target profit
Key rule: Sales revenue = units × selling price. Don't confuse unit count with revenue — always check what the question asks for.
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