Question

Head-First Company plans to sell 4,400 bicycle helmets at $70 each in the coming year. Variable cost is 60% of the sales price; contribution margin is 40% of the sales price. Total fixed cost equals $50,300 (includes fixed factory overhead and fixed selling and administrative expense). Required:

1. Calculate the sales revenue that Head-First must make to earn operating income of $78,500 by using the point in sales equation.

2. Check your answer by preparing a contribution margin income statement based on the sales dollars calculated in Requirement 1.

Answer 1

Selling price per unit = $ 70

Variable cost = 60% of sales

Variable cost per unit = 70 x 60%

= $ 42

Contribution margin per unit = selling price per unit - variable cost per unit

= 70 - 42

= $ 28

Total fixed cost = $ 50,300

1.) Target profit = $ 78,500

Let the number of unit to be sold to earn target profit = K unit

Profit = Sales - Total variable cost - Total Fixed cost

78,500 = 70 K - 42 K - 50,300

28 K = 1,28,800

K = 4,600 units

Sales revenue to earn target profit of $ 78,500 = 70 x K

= 70 x 4,600

= $ 322,000

2)  

Contribution Margin Income Statement
Sales (4600 x 70)	322,000
Variable Cost (4600 x 42)	- 193,200
Contribution Margin	128,800
Fixed Cost	- 50,300
Net Income	78,500

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