ExpertMedium1 markMultiple Choice
CPA · Question 17 · Area I: Business Analysis
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?
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:
A.
$1,250,000
B.
$1,000,000
C.
$1,500,000
D.
$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
C
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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