Question

Freeman Auto wants to generate an operating profit of $200,000.00 to cover interest expense and meet a desired income target. The firm knows that depreciation will be $100,000.00 in the upcoming year. It also knows that Selling and Administrative expenses will total $150,000.00. Finally, cost of goods is historically 40.00% of sales.

What sales must Freeman Auto achieve to meet their operating profit goal?

Answer 1

Answer:

Operating Profit = Gross Profit – Operating Expenses
Operating Expenses = Depreciation + Selling and Administrative Expense
Operating Expenses = $100,000.00 + $150,000.00
Operating Expenses = $250,000.00

Let the Sales be “$x”
Gross Profit = Sales – Cost of Goods Sold
Gross Profit = $x - $0.40x
Gross Profit = $0.60x

Operating Profit = Gross Profit – Operating Expenses
$200,000.00 = $0.60x - $250,000.00
$450,000.00 = $0.60x
x = $750,000

Therefore, Sales of $750,000 should be achieved to meet the Operating goals of $200,000.00