Rodney Rogers, the new commercial operation propagandize graduate, skeleton to open the indiscriminate dairy products firm. The commercial operation will be utterly financed with equity. Rogers expects initial year sales to sum $5,500,000. He desires to consequence the aim pretax distinction of $1,000,000 during his initial year of operation. Variable costs have been 40 percent of sales.
a. How vast can Roger’s bound handling costs be if he is to encounter his distinction target?
b. What is Roger’s breakeven turn of sales during the turn of bound handling costs dynamic in (a)?
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a. How large can Roger’s fixed operating costs be if he is to meet his profit target?
Contribution Margin = Revenues – Variable Costs, so
CM = $5.5m – $2.2m = $3.3m
So if he wants a profit of $1m, his fixed costs cannot exceed $2.3m
b. What is Roger’s breakeven level of sales at the level of fixed operating costs determined in (a)?
Break-even point in sales = Fixed costs divided by CM Ratio
B/E point = $2,300,000/60% = $3,833,333