Question

Gordon Manufacturing earned net income of $100,000 during 2015. The company wants to earn net income of $40,000 more during 2016. The company's fixed costs are expected to be $147,000, and variable costs are expected to be 30% of sales.

Required:
Determine the required sales to meet the target net income during 2016.

Answer 1

Required Sale is $410,000

Step-by-step explanation:

First we have to determine the target profit.

Desired Profit = $100,000 + $40,000 = $140,000

As we know that the selling price is the sum of variable cost and contribution margin, so,

Sales = Variable cost ratio + Contribution margin ratio

100$ = 30% = Contribution margin ratio

Contribution margin ratio = 100% - 30% = 70%

Formula for target sales is as follow

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

Target Sales = ( $147,000 + $140,000 ) / 70% = $410,000

Answer 2

$267,142.86

Step-by-step explanation:

The sales less the variable cost gives the contribution margin. The contribution margin less the fixed cost gives the net operating income.

As such, the total sales less the total cost gives the net income.

Let the required sales be $Y

Y - 0.3Y - 147,000 = 40,000

0.7Y = 40,000 + 147,000

Y = 187,000/0.7

= $267,142.86