Rodney Rogers, a recent business school graduate, plans to instigate a wholesale dairy products firm. The business will be completely financed with equity. Rogers expects first year sale to total $5,500,000. He desires to earn a target pretax profit of $1,000,000 during his first year of operation. Variable costs are 40 percent of sales.
a. How hulking can Roger’s fixed operating costs be if he is to meet his profit target?
b. What is Roger’s breakeven plane of sales at the even of fixed operating costs determined in (a)?
Answers: a. How voluminous can Roger’s fixed operating costs be if he is to meet his profit target?
Contribution Margin = Revenues - Variable Costs, so
CM = $5.5m - $2.2m = $3.3m
So if he requirements a profit of $1m, his fixed costs cannot exceed $2.3m
b. What is Roger’s breakeven level of sale at the level of fixed operating costs determined contained by (a)?
Break-even point in sale = Fixed costs divided by CM Ratio
B/E point = $2,300,000/60% = $3,833,333
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a. How hulking can Roger’s fixed operating costs be if he is to meet his profit target?
b. What is Roger’s breakeven plane of sales at the even of fixed operating costs determined in (a)?
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Answers: a. How voluminous can Roger’s fixed operating costs be if he is to meet his profit target?
Contribution Margin = Revenues - Variable Costs, so
CM = $5.5m - $2.2m = $3.3m
So if he requirements a profit of $1m, his fixed costs cannot exceed $2.3m
b. What is Roger’s breakeven level of sale at the level of fixed operating costs determined contained by (a)?
Break-even point in sale = Fixed costs divided by CM Ratio
B/E point = $2,300,000/60% = $3,833,333
Resolved Questions: