If the contribution margin ratio is 0.40, targeted operating income is $80,000, and targeted sales volume in dollars is $500,000, then total fixed costs are:
A)$80,000
B)$100,000
C)$120,000
D)$200,000

Question

Quizplus · Accepted Answer

Contribution margin ratio = Contribution margin / Sales
0.40 = (Sales - Variable costs) / Sales
Sales - Variable costs = 0.40 * Sales
Sales - 0.40 * Sales = Variable costs
0.60 * Sales = Variable costs
Targeted sales volume in dollars = $500,000
Targeted operating income = $80,000
Contribution margin = (Targeted sales volume in dollars * Contribution margin ratio) = $500,000 * 0.40 = $200,000
Contribution margin = Sales - Variable costs
$200,000 = $500,000 - Variable costs
Variable costs = $300,000
Total Fixed costs = Total costs - Variable costs
Total Fixed costs = ($500,000 + $80,000) - $300,000
Total Fixed costs = $280,000
Therefore, option C, $120,000, is the correct answer.

If the Contribution Margin Ratio Is 0