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Question related to Management Accounting -  Computing required sales to achieve desired profit?

The Larga Marketing Co., is expecting an increase of fixed costs by 78,750 effective January 1, 2020 due to a decision of moving their place of business to the downtown area. Likewise it is anticipating that the selling price per unit and the variable expenses will not change. At present, the sales volume necessary to breakeven is 750,000 , but with the expected increase in fixed costs , the sales volume necessary to breakeven go up to 900 75,000 . Compute the annual sales in pesos during 2020 if the desired annual profit is 700,000 before tax.

Update:

The correct answer is 2,975,000

I just can't seem to arrive at that answer. Need help with the solution

1 Answer

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  • Don G
    Lv 7
    1 month ago

    At Sales of 750,000, VC + FC = 750,000.......

    At Sales of 975,000 (i.e. 900 75,000), VC + FC = 975,000. An increase in Sales of 225,000 had an increase in FC of 78,750, so VC increased by146,250, or 65% of Sales. Therefore, CM = 35% of Sales and FC at breakeven Sales of 750,000 was also 35%, or 262,500. At Sales of 975,000, with VC of 65% (633,750), FC increased by 78,750 to 341,250.

    A pre tax profit of 700,000 + FC of 341,250 requires a CM of 1,041,250. At 35% of Sales, a CM of 1,041,250 / .35 = Sales of 2,975,000. BINGO!

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