Figure 8-4
Dirth Company sells only one product at a regular price of £7.50 per unit. Variable expenses are 60 per cent of sales and fixed expenses are £30,000. Management has decided to decrease the selling price to £6.00 in hopes of increasing its volume of sales.
-Refer to Figure 8-4. What sales pound level is needed to obtain a before-tax profit of £60,000 when the selling price is £6.00 per unit?
A)£360,000
B)£120,000
C)£72,000
D)£90,000

Question

Quizplus · Accepted Answer

To find the sales pound level needed for a before-tax profit of £60,000 with a selling price of £6.00 per unit, we first calculate the contribution margin ratio. At a £6.00 selling price with variable expenses being 60% of sales, the variable cost per unit is £3.60 (60% of £6.00). Thus, the contribution margin per unit is £2.40 (£6.00 - £3.60). The contribution margin ratio is then £2.40 / £6.00 = 0.40 or 40%. To achieve a £60,000 profit, the total contribution margin needed is £60,000 (desired profit) + £30,000 (fixed expenses) = £90,000. Therefore, the required sales level is £90,000 / 0.40 = £225,000. However, this calculation does not align with the provided options, indicating a need for reevaluation based on the given choices.Given the oversight in the initial calculation, let's approach the problem with the correct formula for determining the sales level needed to achieve a target profit, considering the fixed costs and the new contribution margin per unit.The formula to achieve a target profit is: (Fixed Costs + Target Profit) / Contribution Margin Ratio.Given that the variable cost is 60% of sales, at a £6.00 selling price, the variable cost per unit is £3.60, making the contribution margin per unit £2.40 (£6.00 - £3.60). However, to correctly calculate the total sales level needed, we must consider the overall contribution margin ratio and the total contribution margin needed to cover both fixed costs and the desired profit.Reevaluating with the correct approach to match the options provided:The mistake in the initial response was assuming a direct calculation of sales level from the contribution margin per unit without correctly applying it to the desired profit and fixed costs. Given the options and the need for a correct match, let's correct the approach:To find the correct sales level, we use the formula: Required Sales = (Fixed Costs + Desired Profit) / (1 - Variable Cost Ratio).With a selling price of £6.00 and variable costs being 60% of sales, the variable cost ratio is 0.60, making the contribution margin ratio 0.40 (100% - 60%).Fixed Costs = £30,000, Desired Profit = £60,000, thus Required Sales = (£30,000 + £60,000) / 0.40 = £225,000.Given the discrepancy in the initial explanation and the options provided, and without a direct match to the corrected formula's outcome in the options, it's crucial to acknowledge the error in the calculation process. The correct approach involves applying the target profit formula accurately with the given data, but the provided options do not directly reflect the corrected calculation. Therefore, the initial selection was made in error, highlighting the importance of carefully reviewing the calculation and the assumptions made.

Figure 8-4 Dirth Company Sells Only One Product at a Regular Price