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I know breakeven in dollars to be fixed cost divided by contribution margin percentage. However, the following does not apply fixed cost at the numerator, but instead it applied the contribution margin at the numerator. Can somebody help me understand why?
fixed cost given $1,549,980(1,520,640 year 1 + 29,520 additional in year 2).
year 2 contribution margin % = 52% (31.20 contribution margin in year 2 /60 sales price in year 2)
Question: Why is the answer $9,576,000 ($4,979,520 Year 2 target contribution margin ÷ .52 CMR)? Here, they divided the new year 2 contribution margin by the CM percentage, but why ???? See below.
Fact Pattern: Data regarding Year 1 operations for a manufacturer that had no beginning or ending inventories are as follows:
Sales (150,000 units)
Income tax rate
Question: 4 The manufacturer estimates that next year unit contribution margin will be US $31.20. In addition, fixed selling expenses will increase by US $29,520. All other costs will be incurred at the same rates or amounts as the current year. What dollar sales volume, to the nearest dollar, would be required in Year 2 to earn the same net income as in Year 1?
A. US $9,519,231
B. US $4,979,520
C. US $10,374,000
D. US $9,576,000
Answer (D) is correct.
To achieve the manufacturer’s goal of the same net income in Year 2 as in Year 1, the same pretax operating profit must be achieved. Achieving the same pretax operating profit will require contribution margin to increase to cover the additional fixed selling expenses, calculated as follows:
Sales (150,000 units)
Year 1 contribution margin
Additional fixed costs for Year 2
Year 2 target contribution margin
This target contribution margin can be divided by the contribution margin ratio (unit contribution margin ÷ unit selling price) to arrive at the target level of sales. The Year 2 target contribution margin ratio is 52% (US $31.20 ÷ $60.00), and the Year 2 target sales volume is US $9,576,000 ($4,979,520 Year 2 target contribution margin ÷ .52 CMR).
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