Question

10. Sally, Inc. has consistent fixed costs and contribution margin ratios from month to month. In January, Sally produced a $180,800 profit from $300,000 in revenue. In February, Sally produced a $285,800 profit from $450,000 in revenue. What are Sally Inc.'s fixed costs?

Answer 1

	January	February	Change
Sales	300,000	450,000	150,000
Profit	180,800	285,800	105,000
Total Cost	119,200	164,200	45,000

Contribution margin ratio = Change in profit/ Change in sales

= 105,000/150,000

= 70%

Since contribution margin ratio is 70%, hence Variable cost must be 30% of sales.

Total variable cost in January = Sales x 30%

= 300,000 x 30%

= $90,000

Total fixed cost in January = Total cost - Total variable cost

= 119,200-90,000

= $29,200

Hence fixed cost = $29,200

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