Question

Break-Even Sales: Sales for Target Profit

Health-Temp Company is a placement agency for temporary nurses. It serves hospitals and clinics throughout the metropolitan area. Health-Temp Company believes it will place temporary nurses for a total of 21,000 hours next year. Health-Temp charges the hospitals and clinics $120 per hour and has variable costs of $96.00 per hour (this includes the payment to the nurse). Total fixed costs equal $484,800.

Required:

1. Calculate the contribution margin per unit and the contribution margin ratio (express the ratio as a decimal rather than a percentage). If required, round your answers to two decimal places.

Contribution margin per unit	$
Contribution margin ratio

2. Calculate the sales revenue needed to break even.
$

3. Calculate the sales revenue needed to achieve a target profit of $148,800.
$

4. What if Health-Temp had target operating income (profit) of $182,400? Would sales revenue be larger or smaller than the one calculated in Requirement 3?

Larger

Smaller

By how much?
$

Answer 1

1.

Contribution margin per unit	$24 ($120-$96)
Contribution margin ratio	0.2 ($24/$120)

2.

Sales revenue needed to break-even = Fixed costs / Contribution margin per unit

= $484,800 / $24

= 20,200

3.

Sales revenue needed = (Fixed costs + Target profit) / Contribution margin ratio

= ($484,800 + $148,800) / 0.2

= $3,168,000

4.

Sales revenue needed = (Fixed costs + Target profit) / Contribution margin ratio

= ($484,800 + $182,400) / 0.2

= $3,336,000

Sales revenue is larger by $168,000 ($3,336,000 - $3,168,000)