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 dollar level is needed to obtain a before-tax profit of $60,000 when the selling price is $6.00 per unit?

Question

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 dollar level is needed to obtain a before-tax profit of $60,000 when the selling price is $6.00 per unit?

Quizplus · Accepted Answer

Using the contribution margin method, we can find the sales dollar level needed to obtain a before-tax profit of $60,000:

Contribution margin per unit = Selling price per unit - Variable expenses per unit
= $6.00 - ($7.50 x 0.60)
= $2.40

Contribution margin ratio = Contribution margin per unit ÷ Selling price per unit
= $2.40 ÷ $6.00
= 0.40 or 40%

Now we can use the following formula to find the sales dollar level needed:

Fixed expenses + Before-tax profit ÷ Contribution margin ratio = Sales dollar level
$30,000 + $60,000 ÷ 0.40 = $360,000

Therefore, the sales dollar level needed to obtain a before-tax profit of $60,000 when the selling price is $6.00 per unit is $360,000. Therefore, the best choice is A.

Dirth Company Sells Only One Product at a Regular Price