Question

Jackson Company recently calculated its break-even sales revenue to be $32,000. For each dollar of sales revenue, $0.75 goes to cover variable costs. a. Compute the contribution margin ratio. b. Compute the total fixed costs. c. Compute the sales revenue that would have to be generated to earn an operating income of $40,000.

Answer 1

a.

0.25 or 25%

b.

$8,000

c.

$192,000Step-by-step explanation:

Variable cost ratio = Variable cost / Sales = $0.75 / $1 = 0.75

As we know that the net of Selling price and variable cost is the contribution margin and net of selling price and variable ratio is the contribution margin ratio,

a.

Contribution margin ratio = 1 - 0.75 = 0.25

b.

As per break-even formula

Break-even point = Fixed cost / Contribution margin ratio

Placing the available values in the formula

$32,000 = Fixed Cost / 0.25

Fixed cost = $32,000 x 0.25 = $8,000

c.

As per formula

Target Sales revenue = ( Fixed cost + Target profit ) / Contribution margin ratio

Target Sales revenue = ( $8,000 + $40,000) / 0.25

Target Sales revenue = $48,000/ 0.25 = $192,000