Question

Eastwick produces and sells three products. Last month's results are as follows: P1 P2 P3 Revenues $ 300,000 $ 400,000 $ 400,000 Variable costs 60,000 250,000 141,000 Fixed costs total $400,000. What sales volume would generate an operating profit of $250,000? (Assume the current product mix.)

$1,350,000.

$1,290,000.

$1,101,695.

$1,750,000.

Answer 1

Ans:

$1,101,695.

Working:

Particulars	P1	P2	P3	Total
Revenues	$ 300,000	$ 400,000	$ 400,000	$1,100,000
Variable costs	$ 60,000	$ 250,000	$ 141,000	$ (451,000)
Contribution(Revenues- VC)	$ 240,000	$ 150,000	$ 259,000	$ 649,000
Fixed Costs				$(400,000)
Income (contribution – fixed cost)				$ 249,000
PV Ratio = Contribution/Sales *100	59%
Fixed Costs	$400,000
Desired operating Profit	$250,000
Total Contribution desired	$650,000
Sales in $ required = (Desired Contribution/PV Ratio)	$1,101,695

Explanation:

1) Sales in $ to earn Desired profit = (Fixed cost + Desired profit )/Contribution margin ratio

2) contribution margin ratio is also called PV ratio i.e profit volume ratio