The Martinez Game Co. produces and sells parlor games. In 2005 sales were $400,000, total variable costs were $200,000, and total fixed costs were $150,000. What is the total revenue required to increase pretax profits by $40,000 and to cover an expected increase of $20,000 in fixed costs?
A) $300,000
B) $400,000
C) $480,000
D) $520,000

Question

Quizplus · Accepted Answer

To increase pretax profits by $40,000 and cover an additional $20,000 in fixed costs, the company needs to generate an additional $60,000 in profit. The contribution margin is $200,000 ($400,000 - $200,000). To achieve the additional $60,000, the company needs to generate $60,000 / ($200,000/$400,000) = $120,000 in additional sales. Thus, the total revenue required is $400,000 + $120,000 = $520,000.