Question

Bascatt Company currently distributes a product that sells for $24.00 per unit and has a contribution margin ratio of 30%. The company’s fixed expenses are $118,800 per year. The company plans to sell 18,100 units this year.

By using a new supplier, the company believes it can reduce its variable expenses by $2.40 per unit. If the company decides use the new supplier, what dollar sales is required to attain a target profit of $46,800?

Answer 1

Contribution margin ratio=Contribution margin/Sales

Hence Contribution margin is=(24*30%)

=$7.2 per unit

Contribution margin=Sales-Variable cost

Hence current Variable cost=(24-7.2)=$16.8

New variable cost =16.8-2.4 =$14.4 per unit

Hence Contribution margin will be =24-14.4

=$9.6 per unit

Hence Contribution margin ratio=(9.6/24) =0.4

Target contribution margin=Fixed cost+Target profits

=118,800+46,800

=$165600

Hence target sales=Target contribution margin/contribution margin ratio

=$165600/0.4

=$414,000