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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773

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BuyFindarrow_forward

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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Sales Needed to Earn Target Income

Head-First Company plans to sell 5,000 bicycle helmets at $75 each in the coming year. Variable cost is 60% of the sales price; contribution margin is 40% of the sales price. Total fixed cost equals $49,500 (includes fixed factory overhead and fixed selling and administrative expense).

Required:

  1. 1. Calculate the sales revenue that Head-First must make to earn operating income of $81,900 by using the point in sales equation.
  2. 2. Check your answer by preparing a contribution margin income statement based on the sales dollars calculated in Requirement 1.

1.

To determine

Compute the sales revenue to earn operating income of $81,900.

Explanation

Target Income:

Target income refers to the benchmark that is required to achieve for the functioning of the company. It is calculated either in terms of the number of units or sales dollar.

Use the following formula to compute the sales revenue for target income:

Sales for Target Income=Fixed cost+Target incomeContribution margin ratio

Substitute $49,500 for fixed cost, $81,900 for target income and 0

2.

To determine

Prepare the contribution margin income statement of Company H.

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