Question

A furniture manufacturer specializes in wood tables. The tables sell for $150 and incur $60 in variable costs. The company has $11, 700 in fixed costs per month. The company desires to earn an operating profit of $10, 800 per month. (Abbreviation used; CM = contribution margin.)
1. Calculate the required sales in units to earn the target profit using the equation method.
2. Calculate the required sales in units to earn the target profit using the contribution margin method.
3. Calculate the required sales in dollars to earn the target profit using the contribution margin ratio method.
4. Calculate the required sales in units to break even using the contribution margin method.

Answer 1

Answer:

1. 250 wood tables

2. 250 wood tables

3. $37,500

4. 130 wood tables

Explanation:

Sales (units) required to earn a target profit = (Fixed Costs + Target Profit) ÷ Contribution per unit

Where,

Contribution per unit = Selling Price per unit - Variable Costs per unit

                                   = $150 - $60

                                   = $90

Therefore,

Sales (units) required to earn a target profit = ($11, 700 +  $10, 800) ÷ $90

                                                                        =  250 wood tables

Contribution Margin Ratio = Contribution / Sales × 100

                                           = $90 / $150 × 100

                                           = 60 %

Sales (dollars) required to earn a target profit = (Fixed Costs + Target Profit) ÷ Contribution Margin Ratio

                                            = ($11, 700 +  $10, 800) ÷ 60%

                                           = $37,500

Sales in Units to Break Even = Fixed Costs ÷ Contribution per unit

                                               = $11, 700 ÷ $90

                                               = 130 wood tables