A company has variable costs that are 4/7 the value of their sales revenues. Total net income for the most recent period was a profit of $53 770 and sales were $420 000. The company has started a new marketing campaign that they hope will increase sales, but it will require additional advertising of $6400. 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) $434 933.33
B) $326 357.50
C) $420 210.00
D) $140 396.67
E) $105 297.50

Question

Quizplus · Accepted Answer

First, we need to calculate the variable costs:
Variable Costs = (4/7) x Sales Revenues
Variable Costs = (4/7) x 420 000
Variable Costs = 240 000

Next, we can calculate the contribution margin:
Contribution Margin = Sales Revenues - Variable Costs
Contribution Margin = 420 000 - 240 000
Contribution Margin = 180 000

Using the contribution margin ratio, we can calculate the breakeven point:
Contribution Margin Ratio = Contribution Margin / Sales Revenues
Contribution Margin Ratio = 180 000 / 420 000
Contribution Margin Ratio ≈ 0.4286

Breakeven Point = Fixed Costs / Contribution Margin Ratio
Breakeven Point = (240 000 + 53 770 + 6 400) / 0.4286
Breakeven Point ≈ 754 933.33

Finally, we can calculate the new sales target to maintain the same profitability:
New Sales Revenues = (Fixed Costs + Desired Profit + Additional Costs) / Contribution Margin Ratio
New Sales Revenues = (240 000 + 53 770 + 6 400) / 0.4286
New Sales Revenues ≈ 434 933.33

Therefore, the company needs to generate $434 933.33 in sales to remain at the same level of profitability after the new ad campaign. The answer is A.

A Company Has Variable Costs That Are 4/7 the Value