Answer the following questions using the information below:
Sales of Blair Inc. have been on a steady decline for the last 12 months. A market research study conducted revealed that the product of Blair Inc. can be sold only for $400 as opposed to the current market price charged of $500 per unit. Blair Inc. has decided to revise its sales price to $400. The annual sales target volume of the product after price revision is 200 units. Blair Inc. wants to earn 18% on its sales amount.
-What is the target operating income?
A) $16,992
B) $14,400
C) $11,808
D) $3,240

Question

Quizplus · Accepted Answer

First, we need to calculate the contribution margin per unit:
Current contribution margin = $500 - variable cost per unit
Let’s assume the variable costs per unit are $300
Current contribution margin per unit = $500 - $300 = $200
New contribution margin per unit = $400 - $300 = $100

Now we can calculate the target operating income:
Target operating income = (total sales - total variable costs) - total fixed costs
Total sales = 200 units x $400 per unit = $80,000
Total variable costs = 200 units x $300 per unit = $60,000
Total fixed costs = Unknown

We know the target operating income should be 18% of total sales, so we can use this equation to solve for total fixed costs:
Target operating income = 18% x total sales
$14,400 = 18% x $80,000
Total fixed costs = ($14,400 / 18%) - $80,000 = $3,200

Now we can plug in the numbers:
Target operating income = ($80,000 - $60,000) - $3,200
Target operating income = $16,800 - $3,200
Target operating income = $13,600

Therefore, the target operating income is $13,600 which is closest to option B, $14,400.

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