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 29,000 hours next year. Health-Temp charges the hospitals and clinics $110 per hour and has variable costs of $95.70 per hour (this includes the payment to the nurse). Total fixed costs equal $404,690.

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 $88,660

4. What if Health-Temp had target operating income (profit) of $108,680? Would sales revenue be larger or smaller than the one calculated in Requirement 3? By how much?

Answer 1

Answer:-1)- Contribution margin per unit/hour=Revenue per hour-Variable cost per hour

=$110 per hour - $95.70 per hour =$14.30 per hour

Contribution margin ratio =( Contribution margin per hour/ Revenue per hour)*100

=($14.30 per hour/$110 per hour)*100 =13%

2)-Sales revenue needed to break even =Fixed cost/ Contribution margin ratio

=$404690/13% =$3113000

3)- Sales revenue to achieve target profit= Fixed cost+ Target profit/ Contribution margin ratio

=$404690+$88660/13%

=$493350/13%

=$3795000

4) If Health-Temp had target operating income (profit) of $108680, the sales revenue would be larger than the one calculated in Requirement 3 (ie-$3949000-$3113000=$836000
Explanation:-

$404690+$108680/13%

=$513370/13%

=$3949000