ITPEC FE Morning April 2018 Question 78
Topic: Corporate Activities
Company A sets a goal to make a profit of $36,000 under the conditions shown in the table below. What is the minimum sales revenue for the company to achieve its goal?
Explanation
260,000 dollars — the sales revenue at which the contribution margin covers both the fixed cost and the target profit.
- •Contribution margin per unit: 40 − 28 = 12 dollars, so the contribution margin ratio is 12 ÷ 40 = 0.3
- •Contribution needed: fixed cost plus target profit, 42,000 + 36,000 = 78,000 dollars
- •Sales revenue: 78,000 ÷ 0.3 = 260,000 dollars, which is 78,000 ÷ 12 = 6,500 units at 40 dollars each
Answer (d)
Why not others:
- •(a) 3,500 — 42,000 ÷ 12, the break-even quantity in units: it leaves out the target profit and is a count, not revenue
- •(b) 6,500 — the number of units needed for the target, not converted into sales revenue at 40 dollars each
- •(c) 140,000 — 42,000 ÷ 0.3, the break-even sales revenue, which covers the fixed cost but earns no profit
Key rule: Required sales = (fixed cost + target profit) ÷ contribution margin ratio; divide by the unit margin instead and you get units, not revenue.
Corporate Activities · AI-written, may contain errors
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