You have recently come into a small inheritance…congratulations on your good for

Question

You have recently come into a small inheritance…congratulations on your good fortune.

You are certain that the best use of your newfound funds is to invest in your own wholesale solar panel manufacturing firm. You anticipate first year sales to reach $2.3 million dollars. You anticipate earning a pretax profit of $750,000 during your first full year of operations. You anticipate your variable costs to remain near 25% of your sales throughout the year.

Determine what the maximum fixed costs will be if you are to meet your pretax profit estimate.

Once you determine your maximum fixed costs, determine your breakeven level of sales based on that number.

**PLEASE SHOW ALL WORK / STEPS TO SOLUTION! THANK-YOU!**

Explanation / Answer

Solution:

Maximum fixed cost = $ 975,000.

$ Sales          2,300,000 Less: Variable cost ( 25 % )              575,000 Contribution =Sales - variable cost          1,725,000 Contribution Margin ratio 75% Contribution = Fixed cost + profit Profit              750,000 Therefor, fixed cost = Contribution - Profit              975,000 Breakeven = Fixed cost / Contribution margin ratio          1,300,000

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