Howard Enterprises has a contribution margin ratio of 65% and fixed costs of $15,000. What would sales have to be in order for Howard to earn an after-tax profit of $50,000? The company is in the 40% tax bracket.

Question

Quizplus · Accepted Answer

First, we need to calculate the company's before-tax profit:

Target profit = After-tax profit / (1 - Tax rate) 
Target profit = $50,000 / (1 - 0.4) = $83,333.33

Next, we can use the contribution margin ratio to calculate the required sales:

Contribution margin ratio = (Sales - Variable costs) / Sales 
0.65 = (Sales - (Sales x 0.35)) / Sales 
0.65 = 0.65 
Sales = Fixed costs + Target profit / Contribution margin ratio 
Sales = $15,000 + $83,333.33 / 0.65 
Sales = $151,282.05

Therefore, choice letter C is the correct answer.

Howard Enterprises Has a Contribution Margin Ratio of 65% and Fixed