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

answer; break-even analysis;

answer: in the short-run firms will respond by raising the price of turkey.

explanation: initially the long-run equilibrium is at a price of $5 per pound of turkey and a quantity of 50 million pounds per year. now, when webmd claims that a protein found in turkey will increase your expected lifespan by 4 years. the consumers demand for turkey will increase at every price shifting the demand curve to the right from d1 to d2. while, there will be no change in the supply curve in the short-run as it is not possible for producers to adjust supply so quickly. as a result the new equilibrium will occur at a higher price and a higher quantity of turkey.

thus, in the short run firms will respond by increasing the price of turkey, selling more quantity at a higher price and earning economic profits.