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).