Question

Watson Company has monthly fixed costs of $88,000 and a 40% contribution margin ratio. If the company has set a target monthly income of $15,500, what dollar amount of sales must be made to produce the target income?

Answer 1

$258,750

Explanation:

Both sales and variable cost are dependent on the number of units sold.

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 net operating income/loss is the difference between the sales and the total costs

Contribution margin ratio is the ratio of contribution margin to sales.

Given that the target ratio is 40%, let the sales required by S in dollars, the variable cost be V. Then;

(S - V ) is the contribution margin and

(S - V)/S = 40%

S - V = 0.4S

V = 0.6S

With a target monthly income of $15,500

S - 0.6S - 88,000 = 15,500

0.4S = 103,500

S = 103,500/0.4

= $258,750