Last year, Terrific Copying had total revenue of $475 000, while operating at 60% of capacity. The total of its variable cost is $150 000. Fixed costs were $180 000. What is the expected revenue this year at full capacity?
A) $791 667
B) $250 000
C) $300 000
D) $550 000
E) $1 341 667

Question

Quizplus · Accepted Answer

To find the expected revenue at full capacity, we need to use the concept of the contribution margin.

Contribution margin = Total revenue - Variable costs

Contribution margin ratio = Contribution margin / Total revenue

Using the information given in the problem, we can calculate the contribution margin ratio:

Contribution margin ratio = (Total revenue - Variable costs) / Total revenue

= ($475 000 - $150 000) / $475 000

= 0.684

This means that for every dollar of revenue generated, 68.4 cents contribute to covering fixed costs and profits.

To find the expected revenue at full capacity, we can set up the following equation:

(Contribution margin ratio) x (Full capacity revenue) = Fixed costs + Target profit

We don't have a target profit in this problem, so we can assume it to be zero. Thus,

(0.684) x (Full capacity revenue) = $180 000

Full capacity revenue = $180 000 / 0.684

Full capacity revenue = $263 157

However, this is the expected revenue when operating at full capacity. The question is asking for the expected revenue this year at full capacity, which means we have to take into account the fact that last year the company was operating at 60% of capacity.

If Terrific Copying was operating at 60% of capacity last year, then it means that its actual revenue was 60% of what it could have been at full capacity.

Actual revenue last year = 60% x (Full capacity revenue)

$475 000 = 0.6 x (Full capacity revenue)

Full capacity revenue = $475 000 / 0.6

Full capacity revenue = $791 667

Therefore, the expected revenue this year at full capacity is $791 667.

The best choice is (A).

Last Year, Terrific Copying Had Total Revenue of $475 000