Question

For Flynn Company, variable costs are 60% of sales, and fixed costs are $177,600. Management’s net income goal is $68,520. Compute the required sales in dollars needed to achieve management’s target net income of $68,520. (Use the contribution margin approach

Answer 1

Answer:

The required sales in dollars are $615,300.

Explanation:

Variable costs increase and decrease with sales, if your sales rise, the variable costs will rise too. Yet, the contribution marginal remains equal. It is calculated as $(Sales - Variable.costs)/Sales$. Another form to express that equation is $Sales/Sales - Variable.costs/Sales$. Sales/sales is equal to 1, and variable costs/sales is 0.60. So, the contribution margin is equal to 40%, or $0.4 per each dollar of sales.

Then, in order to calculate how much sales you need to pay the fixed costs, you need this equation $177,600/0,4 = 444,000$. That means that you need $444,000 of sales to cover the fixed costs.

The same calculation is used to obtain the sales needed to achieve the target net income: $68,520/0,4 = 171,300$.

If you add the two results, then you obtain that you need $444,000 + 171,300 = 615,000$ dollars of sales to achieve the target net income of $68,520.