Tropp Corporation sells a product for $10 per unit. The fixed expenses are $420,000 per month and the unit variable expenses are 60% of the selling price. What sales would be necessary in order for Tropp to realize a profit of 10% of sales? (Round your intermediate calculations to 2 decimal places.)
A) $1,050,000
B) $945,000
C) $1,400,000
D) $840,000

Question

Quizplus · Accepted Answer

First, we need to determine the contribution margin per unit:

Selling price per unit = $10
Unit variable expenses = 60% of $10 = $6
Contribution margin per unit = Selling price per unit - Unit variable expenses = $10 - $6 = $4

Next, we need to determine the break-even point in units:

Fixed expenses = $420,000
Contribution margin per unit = $4
Break-even point in units = Fixed expenses / Contribution margin per unit = $420,000 / $4 = 105,000 units

To realize a profit of 10% of sales, we need to determine the target net income:

Sales = $x
Variable expenses = 60% of $x = $0.6x
Contribution margin = Sales - Variable expenses - Fixed expenses
$4 = $x - $0.6x - $420,000
$4 = $0.4x - $420,000
$420,000 + $4 = $0.4x
$424 = $0.4x
$x = $1,060,000

Therefore, the sales necessary for Tropp to realize a profit of 10% of sales is $1,060,000, which is closest to answer choice C ($1,400,000).

Tropp Corporation Sells a Product for $10 Per Unit