[I'm, Ron Burgundy?]

I pulled this from the Wiley Test Bank. I’m stumped on this. Primarily, the explanation is vague. I don’t understand how they are coming up with the answer. Perhaps someone could explain it better. I understand the formula as it seems to be a regression analysis. How are they coming up with the $400,000? Any help would be greatly appreciated.

Question:

Koby Co. has sales of $200,000 with variable expenses of $150,000, fixed expenses of $60,000, and an operating loss of $10,000. By how much would Koby have to increase its sales in order to achieve an operating income of 10% of sales?

Possible Answers:

$400,000

$231,000

$251,000

$200,000

Answer and Explanation:

$200,000

The solutions approach is to use the standard breakeven formula and solve for sales (S). Variable costs are $150,000 at a sales level of $200,000; therefore, variable costs are .75S ($150,000/$200,000). S = VC + FC + Expected profit S = .75S + $60,000 + .10S .15S = $ 60,000 S = $400,000 Remember that the requirement was the increase in sales to achieve a profit of 10% of sales. The correct answer is $200,000 ($400,000 total sales needed less $200,000 present sales level).

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[Anonymous]

I struggled with this for a bit, I'll try to explain it…

first step is to figure out the VC as a percentage of its sale which is 75% (150/200).

Then you can use the following equation to figure the rest out. Equation is simply Sales minus the VC minus the FC equals the desires ending result.

S – .75S – 60,000 = .1S

.25S – .1S = 60,000

S = 60,000/.15

S = 400,000

I hope this helps!

[Anonymous]

It helps me to picture an Income Statement:

Sales

<0.75Sales>

---

0.25Sales

<$60,000>

---

0.10Sales

=========

0.10Sales + $60,000 = 0.25Sales

$60,000 = 0.15Sales

$60,000/0.15 = Sales

Sales = $400,000

[Author]

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