Question

Exercise 05-14 Predicting sales and variable costs using contribution margin LO C2 Bloom Company management predicts that it will incur fixed costs of $160,000 and earn pretax income of $164,000 in the next period. Its expected contribution margin ratio is 25%. Required: 1. Compute the amount of total dollar sales. 2. Compute the amount of total variable costs.

Answer 1

Answer:

Explanation:

1. Fixed Costs = 160,000

Pretax income = 164,000

Total contribution desired = 324,000 [160,000+164,000]

CM Ratio = 0.25

Sales = 324,000/0.25 = 1,296,000

2. Variable costs = Sales - Fixed costs - Pretax income = 1,296,000 - 160,000 - 164,000 = 972,000

So Total Sales amount to $1,296,000 and Variable cost is $972,000

Answer 2

Answer:

1. $1,296,000

2. $972,000

Explanation:

The pretax income is the difference between the total sales and total expense (excluding tax). The total expense is the sum of the fixed and variable expense.

Both total sales and variable cost have a unit value and are determined by the level of activities. Contribution margin is the difference between the total sales and the variable cost.

The difference between the contribution margin and the fixed cost gives the pretax income.

Hence contribution margin

= $160,000 + $164,000

= $324,000

Contribution margin ratio is the ratio of contribution to sales.

0.25 = $324000/sales

Sales = $1,296,000

Variable cost = $1,296,000 - $324,000

= $972,000