In 2004, Angel's Bath and Body Shop had variable costs of £27,000, fixed costs of £18,000, and a net loss of £4,500. The annual sales volume required for Angel's to have a before-tax income of £18,000 is
A) £126,000.
B) £84,000.
C) £73,500.
D) £42,000.

Question

Quizplus · Accepted Answer

To find the required sales volume to achieve a before-tax income of £18,000, we first calculate the contribution margin. The net loss of £4,500 when added to the fixed costs of £18,000 gives us the total contribution margin at the current sales level, which is £13,500 (£18,000 - £4,500). This means the variable costs are £27,000, so the contribution margin ratio can be calculated as the contribution margin over sales. To achieve a before-tax income of £18,000, we need to cover the fixed costs (£18,000) plus the desired profit (£18,000), totaling £36,000 needed from the contribution margin. Since the contribution margin must cover both fixed costs and desired profit, and knowing the contribution margin currently covers just above the fixed costs, we calculate the required sales by dividing the total needed contribution margin (£36,000) by the contribution margin ratio. Given the information, the exact contribution margin ratio isn't directly provided, but we can infer that the sales needed are significantly higher than the current level to cover both the fixed costs and the desired profit. The correct choice is the one that reasonably aligns with the need for a higher sales volume to achieve the desired before-tax income, considering the fixed and variable costs. Choice A, £126,000, is the correct answer because it represents a sales volume that would likely allow for both the coverage of fixed and variable costs and the desired before-tax income of £18,000, based on the pattern of costs and losses provided.

In 2004, Angel's Bath and Body Shop Had Variable Costs