The company has a target net income of $206,000. What is the required sales in dollars for the company to meet its target?

Complete Question:

Blue Spruce Corporation has collected the following information after its first year of sales. Sales were $1,600,000 on 100,000 units, selling expenses $240,000 (40% variable and 60% fixed), direct materials $514,000, direct labor $270,800, administrative expenses $280,000 (20% variable and 80% fixed), and manufacturing overhead $376,000 (70% variable and 30% fixed). Top management has asked you to do a CVP analysis so that it can make plans for the coming year. It has projected that unit sales will increase by 10% next year.

Requirement:

The company has a target net income of $206,000. What is the required sales in dollars for the company to meet its target?

$2,747,200

Explanation:

We can calculate the target sales by using the following following formula:

Target Sales = (Fixed Cost + Target Net Income) / Contribution to Sales Ratio (Step1)

Here

Target Net Income is $206,000

Fixed Cost includes 60% of selling expenses $240,000 (100%), 80% of administrative expenses $280,000 (100%) and 30% of manufacturing overhead $376,000 (100%).

This means that:

Total Fixed Cost = 60% * $240,000    +   80% * $280,000    +   30% * $376,000

Fixed Cost = $144,000  +   $224,000   +   $112,800

Fixed Cost = $480,800

Contribution to Sales ration is 25%

By putting values in the above equation, we have:

As we know that:

Contribution to Sales Ratio = (Selling Price per Unit (Step2)   -   Variable Cost per Unit (Step3)  ) / Selling Price per Unit

Here

Selling Price per unit is $16 per Unit

Variable Cost per Unit is $12 per Unit

Contribution Sales Ratio is 25%

By putting values, we have:

Contribution Sales Ratio = ($16 per Unit -  $12 per Unit) / $16 per Unit

Contribution Sales Ratio = 25%

Selling price per unit = Total sales / Total units = $1,600,000 / 100,000 Units

Selling price per unit = $16 per Unit

Here, the first thing that we would compute will be total variable cost and then we will calculate variable cost per unit.

Here

Total Variable Cost = (Selling expenses $240,000 * 40%)    + (Direct Material Cost $514,000)     +    (Direct Labor Cost of $270,800)    +    (Administrative expenses of $280,000 * 20%)    +   (Manufacturing overhead $376,000 * 70%)

Total Variable Cost = ($240,000 * 40%)  +  ($514,000)  +  ($270,800)    +    ($280,000 * 20%)    +   ($376,000 * 70%)

= $96,000 + $514,000  +  $270,800  +  $56,000  +  $263,200

Total Variable Cost = $1,200,000 for 100,000 Units

Variable Cost For single unit = $1,200,000 / 100,000 Units

Variable Cost per Unit = $12 per Unit