Watson Company has monthly fixed costs of $83,000 and a 40% contribution margin ratio. If the company has set a target monthly income of $15,000, what dollar amount of sales must be made to produce the target income?

Question

Quizplus · Accepted Answer

First, we need to calculate the company's total monthly variable costs by subtracting the contribution margin ratio (40%) from 100%:

100% - 40% = 60%

This means that Watson Company's variable costs are 60% of its total sales.

Next, we can use the formula:

Sales - Total Variable Costs - Fixed Costs = Profit

We know that Watson Company wants to make a profit of $15,000, so we can rearrange the formula to solve for sales:

Sales = Total Variable Costs + Fixed Costs + Profit

Sales = 0.6(Sales) + $83,000 + $15,000

0.4(Sales) = $98,000

Sales = $245,000

Therefore, Watson Company must make $245,000 in sales to produce a target income of $15,000. Choice B is the correct answer.

Watson Company Has Monthly Fixed Costs of $83,000 and a 40