Gail Co sells a single product for $40 per unit. Fixed costs are $195 000 and variable costs equal 75% of sales. If fixed costs increase by $15 000, Gail will have to increase sales by how much just to earn profits equal to those earned before costs increased?

Question

Quizplus · Accepted Answer

The increase in fixed costs is $15,000. Since variable costs are 75% of sales, the contribution margin is 25% of sales. To cover the additional $15,000 in fixed costs, sales must increase by $15,000 / 0.25 = $60,000.

Gail Co Sells a Single Product for $40 Per Unit