Question

The University Golf Shop desires to make $10,000 in pretax profits. If the contribution margin ratio (CMR) is 50% and the fixed costs are $110,000, what is the required level of sales

Answer 1

The required level of sales is $240,000.

Step-by-step explanation:

Contribution margin is the profit margin which is available for the fixed cost of the business as the variable cost already been deducted.

Contribution Margin ratio = 50%

Fixed Cost = $110,000

Desired profit = $10,000

We can calculate the Target sales required to earn desired Profit of $$10,000 by using following formula

Target Sales = ( Fixed Cost + Desired Profit ) / Contribution Margin ratio

Target Sales = ( $110,000 + $10,000 ) / 50%

Target Sales = $120,00 / 50%

Target Sales = $120,00 / 0.5

Target Sales = $240,000

It means that the University Golf shop requires $240,000 to earn a pretax profit of $10,000.