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 23,500 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 $548,640.

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?

By how much?
$

Answer 1

1.

Contribution margin per unit = Revenues per hour - Variable costs per hour

= $120 - $96

= $24

Contribution margin ratio = Contribution margin per hour / Revenues per hour

= $24 / $120

= 0.2

2.

Sales revenues needed to break-even = Fixed costs / Contribution margin ratio

= $548,640 / 0.2

= $2,743,200

3.

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

= ($548,640 + $148,800) / 0.2

= $3,487,200

4.

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

= ($548,640 + $182,400) / 0.2

= $3,655,200

Sales revenue is larger by $168,000 ($3,655,200 - $3,487,200)