Dirth Company sells only one product at a regular price of £7.50 per unit. Variable expenses are 60 percent of sales and fixed expenses are £30,000. Management has decided to decrease the selling price to £6.00 in hopes of increasing its volume of sales. What sales pound level is needed to obtain a before-tax profit of £60,000 when the selling price is £6.00 per unit?
A) £360,000
B) £120,000
C) £72,000
D) £90,000

Question

Quizplus · Accepted Answer

The contribution margin per unit can be calculated as follows:
Selling price per unit - Variable expenses per unit
£6.00 - (60% x £6.00) = £2.40

To earn a before-tax profit of £60,000, the contribution margin must cover the fixed expenses plus the target profit:
Contribution margin = Fixed expenses + Target profit
X = £30,000 + £60,000
X = £90,000

Now, we can use the contribution margin ratio to calculate the required sales pound level:
Contribution margin ratio = Contribution margin / Selling price
0.4 = (£2.40 / £6.00)

Sales pound level = (Fixed expenses + Target profit) / Contribution margin ratio
Sales pound level = (£90,000) / (0.4)
Sales pound level = £360,000

Therefore, to obtain a before-tax profit of £60,000 when the selling price is £6.00 per unit, the company needs to achieve sales of £360,000.

Dirth Company Sells Only One Product at a Regular Price