The Martinez Game Co. produces and sells parlour games. In 2005, sales were $400,000, total variable costs were $200,000, and total fixed costs were $150,000. What is the total revenue required to increase pre-tax profits by $40,000 and to cover an expected increase of $20,000 in fixed costs?

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Quizplus · Accepted Answer

To increase pre-tax profits by $40,000 and cover an additional $20,000 in fixed costs, the company needs to generate an additional $60,000 in contribution margin. The contribution margin ratio is 50% ($200,000 contribution margin from $400,000 sales). Therefore, the additional revenue required is $60,000 / 0.5 = $120,000. Adding this to the original $400,000 revenue gives $520,000.