Decision Focus: Break-Even and Target Profit After Chris received and reviewed t

Question

Decision Focus: Break-Even and Target Profit

After Chris received and reviewed the cost and expense estimates, he realized that Holly had given him all the data without breaking it out into fixed and variable components. He called her, and she told him the following: "Factory overhead and selling expenses are 40 percent variable, but other administrative expenses are 30 percent variable."

Required:

A.  How much revenue must ZIA generate to break even?
$

B.  Chris Rickard has set a pre-tax target profit of $700,000 for next year. How much revenue must ZIA generate to achieve Chris's goal?
$

Explanation / Answer

Part A:

Fixed Cost = 300000*60% (Selling Expenses) + 100000*70% (Other Adminstrative Expenses) = 250000

Contribution Ratio = Contribution/Sales*100

Contribution = Sales - Variable Costs = 3000000 - 800000 (Direct Material) - 700000 (Direct Labor) - 750000 (Manufacturing Overhead) - 300000*40% (Variable Selling Expenses) - 100000*30% (Other Adminstrative Expenses) = 600000

Contribution Ratio = 600000/3000000*100 = 20%

Break Even Point (Sales) = Fixed Cost/Contribution Ratio = 250000/20% = 1250000

Answer is 1250000.

Part B:

Sales (Revenue) = (Desired Profit + Fixed Cost)/Contribution Ratio = (700000 + 250000)/20% = 4750000

Answer is 4750000.

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