Petros's Greek Food Stand had the following results last month: Sales revenues were $4,000, variable costs of were $2,000, and the fixed costs for Petros's stand were $1,000 per month. If Petros's cost structure remains the same and Petros wishes to achieve his targeted operating income goal of $2,000 next month, how much in total sales revenue will Petros require?

Question

Quizplus · Accepted Answer

Contribution margin is equal to sales revenues minus the variable costs, thus $4,000 - $2,000 = $2,000. Contribution margin ratio = $2,000 variable costs ÷ $4,000 sales revenues = 50%. With fixed costs of $1,000, operating profit was $1,000 last month. To reach a targeted operating income level of $2,000, Petros will have to generate sufficient sales revenues that carry a 50% contribution margin ratio to offset his $1,000 of fixed costs, and still generate the $2,000 in targeted operating profit. Therefore, $2,000 of target profit plus $1,000 of fixed costs is equal to $3,000. This amount divided by the contribution margin ratio of 50% is equal to $6,000. Sales revenues must be $6,000 to achieve a target operating income of $2,000.

Petros's Greek Food Stand Had the Following Results Last Month