A company has fixed costs of $500,000 and a contribution margin ratio of 40%. If the company wants to achieve a target operating income of $100,000, what sales revenue is required?

Answer options:

$1,250,000

$1,000,000

$1,500,000

$2,500,000

How to approach this question

Formula: Target Sales $ = (Fixed Costs + Target Profit) / Contribution Margin Ratio.

Full Answer

C.$1,500,000✓ Correct

To cover fixed costs and earn a profit, the total contribution margin must equal Fixed Costs + Target Income. Sales = ($500,000 + $100,000) / 0.40 = $1,500,000.

Common mistakes

Forgetting to add target income to fixed costs; dividing by (1 - CM Ratio) incorrectly.

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