Question

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:

1. $1,296,000

2. $972,000

Explanation:

Pretax income is the difference between the total sales and the total expenses. The total expense is made up of the fixed cost and variable cost. The variable cost is dependent on the level of activities. Contribution margin is the net of total sales and total variable cost. The ratio is the ratio of contribution margin to sales.

As such, contribution less fixed cost gives the pretax income.

Contribution margin = $164,000 + $160,000

= $324,000

25% = $324,000/total sales

Total sales = $1,296,000

Total variable costs =  $1,296,000 - $324,000

= $972,000