Kanmore produces and sells three products.Last month's results are as follows: Fixed costs total $200,000.What sales volume would generate an operating profit of $150,000? (Assume the current product mix. )
A)$650,000.
B)$610,000.
C)$729,167.
D)$850,000.

Question

Kanmore produces and sells three products.Last month's results are as follows:  Fixed costs total $200,000.What sales volume would generate an operating profit of $150,000? (Assume the current product mix. )
A)$650,000. 
B)$610,000. 
C)$729,167. 
D)$850,000.

Quizplus · Accepted Answer

To calculate the required sales volume, we need to use the contribution margin ratio (CM ratio) for each product.

Product A: CM ratio = ($600 - $300) / $600 = 0.5
Product B: CM ratio = ($800 - $400) / $800 = 0.5
Product C: CM ratio = ($700 - $500) / $700 = 0.286

Total CM ratio = (0.5 x 1000 + 0.5 x 800 + 0.286 x 1200) / (1000 + 800 + 1200) = 0.45

The total contribution margin (CM) required to reach an operating profit of $150,000 can be calculated as:

CM = Fixed costs + Operating profit = $200,000 + $150,000 = $350,000

Therefore, the required sales volume can be calculated as:

Sales = CM / CM ratio = $350,000 / 0.45 = $777,778

Since this is the total sales required for all three products, we can calculate the sales volume for each product by multiplying the total sales by its respective percentage of total sales:

Product A sales = $777,778 x 0.4 = $311,111
Product B sales = $777,778 x 0.3 = $233,333
Product C sales = $777,778 x 0.3 x 0.2 = $46,296

Adding up the sales for each product, we get a total sales volume of:

$311,111 + $233,333 + $46,296 = $590,740

Therefore, the closest answer choice is C) $729,167, making it the correct answer.

Kanmore Produces and Sells Three Products