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Variable costs as a percentage of sales for Lemon Inc. are 80%, current sales are $600,000,...

Variable costs as a percentage of sales for Lemon Inc. are 80%, current sales are $600,000, and fixed costs are $130,000. What is the number of sales required to achieve a 60,000 net income

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Answer #1

Few starting formulas and their derivation -

1. Sales = Total Cost + Profit

2. Total Cost = Variable Cost + Fixed Cost

3. Sales = Variable Cost + Fixed Cost + Profit

4. Sales - Variable Cost = Fixed Cost + Profit

5. Contribution Margin = Fixed + Profit = Sales - Variable Cost

6. Contribution Margin Ratio = 1 - Variable Cost Ratio

Break-even (in sales $) formula for desired profit = ( Fixed Cost + Desired Profit) ÷ Contribution Margin Ratio

Therefore, in the given problem,

Contribution Margin Ratio = 1 - 80% = 20%

Therefore, Break-even sales = (130000 + 60000) ÷ 20% = 190000 ÷ 20% = $950000.

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