Hopalong Hot Dog Stand had the following results last month: Sales revenues were $6,000, variable costs were $3,000, and fixed costs were $1,500 per month. If Hopalong wants to achieve a targeted operating income goal of $3,000 next month, how much in total sales revenue will be required?

Question

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The contribution margin is equal to sales revenues minus all variable costs. For Hopalong, last month's contribution margin is calculated as $6,000 - $3,000 = $3,000, and the contribution margin ratio as $6,000 ÷ $3,000 = 50%. With fixed costs of $1,500, operating profit was $1,500 last month. To reach a targeted operating income level of $3,000, Hopalong will have to generate sufficient sales revenues that carry a 50% contribution margin ratio to offset the $1,500 of fixed costs, and still generate the $3,000 in targeted operating profit. Therefore, $3,000 of target profit plus $1,500 of fixed costs is equal to $4,500. This amount divided by the contribution margin ratio of 50% is equal to $9,000. Thus, sales revenues must be $9,000 to achieve a target operating income of $3,000.

Hopalong Hot Dog Stand Had the Following Results Last Month