Question

Describe how you would calculate the sales dollars required to meet a target net income.

a. Total fixed costs minus target net income divided by contribution margin ratio
b. Total fixed costs plus target net income divided by contribution margin per unit
c. Total fixed costs plus target net income divided by contribution margin ratio
d. Total fixed costs minus target net income divided by contribution margin per unit

Answer 1

To calculate the sales dollars needed to meet a target net income, add total fixed costs to the target net income and divide by the contribution margin ratio. For example, if the fixed costs are $10,000, the target net income is $5,000, and the contribution margin ratio is 40%, then the required sales are $37,500.

Step-by-step explanation:

To calculate the sales dollars required to meet a target net income, you would use the following formula:

Total sales dollars = (Total fixed costs + Target net income) / Contribution margin ratio

This formula helps to determine the amount of total revenue needed to cover all costs (both fixed and variable) and to achieve the desired net income.

Let's say a company has fixed costs of $10,000, a target net income of $5,000, and a contribution margin ratio of 40%. The calculation would look like this:

Total sales dollars = ($10,000 + $5,000) / 0.40 = $37,500

Therefore, the company must generate $37,500 in sales to meet its target net income of $5,000.