Final answer:
To reach the target pre-tax income of $1,125,000, Wang Co. must achieve sales of $4,812,500, calculated using the contribution margin per unit and fixed costs.
Step-by-step explanation:
In order to calculate the dollar sales needed to earn a target pre-tax net income for Wang Co., we need to use the contribution margin approach, which is based on the contribution margin per unit and fixed costs. The contribution margin per unit is the selling price per unit minus the variable cost per unit. In this case, the contribution margin per unit is $450 (selling price) - $270 (variable costs) = $180. The break-even point in sales dollars can be calculated by dividing the total fixed costs by the contribution margin ratio (contribution margin per unit divided by selling price per unit).
We calculate the break-even point in dollars as follows:
Break-even point in dollars = Total fixed costs / Contribution margin ratio
= $800,000 / ($180 / $450)
= $800,000 / 0.4
= $2,000,000
To achieve the management's target pre-tax income, we add the desired profit to the total fixed costs and then divide by the contribution margin ratio. Thus, the sales needed to achieve a $1,125,000 target profit is calculated as:
Target sales to earn pre-tax income = (Total fixed costs + Target pre-tax income) / Contribution margin ratio
= ($800,000 + $1,125,000) / 0.4
= $1,925,000 / 0.4
= $4,812,500
To sum up, Wang Co. needs to achieve sales of $4,812,500 to meet the target pre-tax net income of $1,125,000.