A company has variable costs that are 1/8 the value of their sales revenues. Total net income for the most recent period was a profit of $50 400 and sales were $500 000. The company has started a new marketing campaign that they hope will increase sales, but it will require additional advertising of $15 000. How many sales dollars does the company have to generate in order to remain at the same level of profitability as before the new ad campaign?
A) $517 142.86
B) $387 100.00
C) 392 100.00
D) $387 100.86
E) 392 100.86

Question

Quizplus · Accepted Answer

First, calculate the original profit margin before the new advertising costs. Variable costs are 1/8 of sales, so for $500,000 in sales, variable costs are $62,500 ($500,000 * 1/8). Fixed costs can be found by subtracting variable costs and profit from sales: $500,000 - $62,500 - $50,400 = $387,100. To maintain the same profit level after adding $15,000 in advertising, the total costs would be $387,100 (original fixed costs) + $15,000 (new advertising) = $402,100. To find the new sales needed to achieve the same profit with the new costs, set up the equation where new sales minus variable costs (1/8 of new sales) minus new total costs equals the original profit ($50,400). Solving for new sales gives $517,142.86.

A Company Has Variable Costs That Are 1/8 the Value