Question

Mr. Y plans to open a take-out restaurant in Addis Ababa City, having estimated total fixed expenses at Birr 24,000 per year and variable expenses at approximately 40 percent of sales revenue. His brother agrees to invest Birr 500,000 if profits reach at least 20 percent of sales revenue. How much sales revenue must be earned to produce profits equal to 20 percent of sales revenue? Provide a contribution income statement to verify your answer.

a. Birr 150,000
b. Birr 200,000
c. Birr 300,000
d. Birr 250,000

Answer 1

Mr. Y must earn Birr 120,000 in sales revenue to produce profits equal to 20 percent of sales revenue.

Step-by-step explanation:

To find the sales revenue needed to produce profits equal to 20 percent of sales revenue, we need to set up an equation. Let x be the sales revenue.

Profit = 20% of Sales Revenue
Profit = 0.2x

Total Expenses = Fixed Expenses + Variable Expenses
Total Expenses = 24000 + 0.4x

To produce profits equal to 20 percent of sales revenue, the equation becomes:
0.2x = 24000 + 0.4x
0.4x - 0.2x = 24000
0.2x = 24000
x = 24000 / 0.2
x = 120000

Therefore, Mr. Y must earn Birr 120,000 in sales revenue to produce profits equal to 20 percent of sales revenue.