Question

4. The manager of Kima’s Food Mart estimates operating costs for the year will include $900,000 in fi xed costs.

Required
a. Find the break-even point in sales dollars with a contribution margin ratio of 40 percent.
b. Find the break-even point in sales dollars with a contribution margin ratio of 25 percent.
c. Find the sales dollars required to generate a profi t of $200,000 for the year assuming a
contribution margin ratio of 40 percent.

Answer 1

a. $2,250,000

b. $3,600,000

c. $2,750,000

Step-by-step explanation:

The computation is shown below:

a. The break even point in sales dollars is

= Fixed cost ÷ contribution margin ratio

= $900,000 ÷ 40%

= $2,250,000

b. The break even point in sales dollars is

= Fixed cost ÷ contribution margin ratio

= $900,000 ÷ 25%

= $3,600,000

c. The sales dollars needed to generate a profit is

= (Fixed cost + target profit) ÷ contribution margin ratio

= ($900,000 + $200,000) ÷ 40%

= $2,750,000