Question

Leonard Bonnington wants to open a shop selling outdoor goods. His monthly expenses include $6,250 for rent, $1,600 for utilities, $500 for insurance and $8,250 for wages. He estimates that his cost of sales is about 60 percent of sales (that is, 60 percent of the selling price of each item is variable costs). Leonard wants to make $7,500 a month.

1. What is rennard's contribution margin?

2. How many sales does he need to make each month to break even?

3. How many sales does he need to make a profit of $7,500 a month?

Answer 1

Expected profit Total fixed costs $7,500 Rent Utilities+Insurance +Wages = $6,250+ $1,600 + $500 + $8,250 = $16,600 Total fixed costs Expected profit 1) Contribution margin $16,600 S7,500 = $24,100 2) Variable cost ratio 60% (Sales Variable costs = Contribution margin) Contribution margin ratio 40% Break even point sales Fixed costs Contribution margin ratio $16,600/40% = $41,500 = (Fixed costs Required profit) Contribution margin ratio = (S16,600+ $7,500) 40% 3) Amount of sales need to make required profit = $24,100/40% $60,250