The current annual budget for Armstrong Ltd. indicates total revenue of $8,000,000. The total variable costs are $1,600,000 and fixed costs are $5,600,000. Calculate the total sales revenue for the year that would be needed for a profit of $2,750,000.
A) $10,437,500
B) $9,387.500
C) $8,250,000
D) $9,750,000
E) $10,750,000

Question

Quizplus · Accepted Answer

To achieve a profit of $2,750,000, Armstrong Ltd. needs to cover its total costs (variable + fixed) and the desired profit. The total costs are $1,600,000 (variable) + $5,600,000 (fixed) = $7,200,000. Adding the desired profit of $2,750,000 to the total costs gives $7,200,000 + $2,750,000 = $9,950,000. The contribution margin ratio is calculated as (Total Revenue - Variable Costs) / Total Revenue. Since variable costs are 20% of the revenue ($1,600,000 is 20% of $8,000,000), the contribution margin ratio is 80%. To find the required sales revenue, divide the total needed (costs + profit) by the contribution margin ratio: $9,950,000 / 0.8 = $12,437,500. My initial calculation was incorrect; the correct approach is to add the desired profit to the total costs and divide by the contribution margin ratio. However, the correct calculation is to find the total amount needed to cover both costs and desired profit, then divide by the contribution margin ratio. The correct calculation should consider the profit margin or contribution margin correctly, which I miscalculated. The correct sales revenue needed is calculated by adding the desired profit to the sum of variable and fixed costs and then dividing by the contribution margin.

The Current Annual Budget for Armstrong Ltd