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APPLICATION: (SHOW ALL CALCULATIONS) Given the following: Income Statement (End of Year, 2017) Industry % of...

APPLICATION: (SHOW ALL CALCULATIONS) Given the following: Income Statement (End of Year, 2017) Industry % of sales Net Sales 500,000 100 Less: Inventory (B) 60,000 12 Gross Purchases 200,000 40 Less: discounts 20,000 4 Net Purchases 180,000 36 Total Goods Available 240,000 48 Less: inventory (E) 75,000 10 Total Cost of Goods Sold 165,000 38 Gross Margin: 335,000 62 Less: Variable Expenses Sales Commissions 130,000 26 Deliveries 5,000 1 135,000 27 Contribution Margin 200,000 35 Less: Fixed Expenses Rent 50,000 10 Salaries 95,000 12 Distribution Rights 5,000 1 150,000 23 Net Profit (BT) 50,000 12

Calculate the firm’s 2017 Breakeven Sales figure. What is the new Breakeven Sales figure if the firm’s management wants to increase next year’s profit margin by 2% of Total Sales? (hint: the 2% increase in sales becomes a target profit).

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Answer #1
Calculation of firm's 2017 Breakeven Sales
Break even sales = Total Fixed Expenses / Contribution Margin %
Contribution Margin % = Contribution Margin / net sales = $200000/$500000 = 40%
Break even sales = $150000 / 40%
Break even sales for 2017 = $3,75,000
Calculation of firm's new Breakeven Sales
New Break even sales = [Total Fixed Expenses + Target profit]/ Contribution Margin %
Total Fixed expenses = $150000
Target profit = Net sales x profit % = $500000 x 12% = $60,000
New Break even sales = [$150000 + $60000]/ 40%
New Break even sales = $5,25,000
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