Contemporary Corp. sells a single product for $80. Variable costs are 40%% of the selling price, and the company has fixed costs that amount to $500,000. Current sales total 18,000 units. In order to produce a target profit of $22,000, Contemporary's dollar sales must total:
A)$36,667.
B)$833,333.
C)$870,000.
D)$1,250,000.
E)$1,305,000.

Question

Quizplus · Accepted Answer

The contribution margin per unit can be found by subtracting the variable costs per unit from the selling price per unit:

$80 * 0.60 = $48

This means that for every unit sold, $48 is available to contribute to covering fixed costs and generating profit.

To calculate the dollar sales necessary to achieve a target profit of $22,000, we can use the following formula:

(Target profit + Fixed costs) / Contribution margin ratio

($22,000 + $500,000) / 0.60 = $870,000

Therefore, the dollar sales must total $870,000 to produce a target profit of $22,000.