Brewster Co. has the following financial information:
Fixed costs $20,000
Variable costs 60%
Sales price $50
What amount of sales is required for Brewster to achieve a 15% return on sales?
a. $33,333
b. $50,000
c. $80,000
d. $133,333
Answer:C
Choice "c" is correct.
Sales of $80,000 provide a 15% return on sales. The required sales volume may be computed algebraically as follows assuming sales = "S" as follows:
S – 0.6S – $20,000 = 0.15S
S – 0.6S – 0.15S = $20,000
0.25 S = $20,000
S = $20,000 ÷ 0.25
S = $80,000
Choice "a" is incorrect. The required level of sales is not computed as the ratio of fixed costs divided by the variable cost percentage ($20,000 ÷ 60%).
Choice "b" is incorrect. Sales of $50,000 are breakeven computed as fixed costs divided by the contribution margin ratio ($20,000 ÷ 0.4). Breakeven provides no return on sales.
Choice "d" is incorrect. The required level of sales is not computed as the ratio of fixed costs divided by the desired profitability ($20,000 ÷ 15%).