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Contribution Margin Ratio Approach

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1. Gold Eagle Company incurs annual fixed costs of $80,000. Variable costs are $6.00 per unit, and the sales price is $10 per unit. Gold Eagle desires to earn an annual profit of $40,000.
Required: Use the contribution margin ratio approach to determine the sales volume in dollars needed to earn the desired profit.

2. Lee Valley Company produces a product that sells for $80 per unit and has variable costs of $50 per unit. Bristol's annual fixed costs are $240,000, and the company wishes to earn a profit of $60,000.
Required: Use the equation method to determine the sales volume in units and dollars required to earn the desired profit.

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Solution Preview

Gold Eagle Company

Contribution Margin = Sale Price - Variable Cost = 10 - 6 = $4 per unit

Contribution Margin Ratio = Contribution Margin per unit / Sale price = 4/10 = ...

Solution Summary

The solution uses the contribution margin ratio approach to determine the sales volume in dollars needed to earn the desired profit and equation method to determine the sales volume in units and dollars required to earn the desired profit.

$2.19