Flannigan Company manufactures and sells a single product that sells for $450 per unit; variable costs are $270. Annual fixed costs are $800,000. Current sales volume is $4,200,000. Flannigan Company management targets an annual pre-tax income of $1,125,000. Compute the dollar sales to earn the target pre-tax net income.

Question

Quizplus · Accepted Answer

The target pre-tax net income is $1,125,000. We can use the following formula to calculate the dollar sales needed to earn the target pre-tax net income:

(Target pre-tax net income + Fixed costs) / Contribution margin ratio

The contribution margin ratio is calculated as:

Contribution margin ratio = (selling price - variable costs) / selling price
Contribution margin ratio = ($450 - $270) / $450
Contribution margin ratio = 0.4

Plugging in the numbers, we get:

($1,125,000 + $800,000) / 0.4 = $4,812,500

Therefore, the dollar sales needed to earn the target pre-tax net income is $4,812,500, which is option B.

Flannigan Company Manufactures and Sells a Single Product That Sells