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pras1
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Posted: 19 Jun 2012 at 08:07 \| IP Logged

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

Can someone help me in solving this? Thanks

ArcSine
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Posted: 19 Jun 2012 at 18:05 \| IP Logged

First establish some notation:
Let S, V, F, and P denote Sales, Variable costs, Fixed costs, and Profit, respectively.

Next note that profit can be represented as
P = S - V - F = S - 0.6S - 20,000 = S(1 - 0.6) - 20,000 (A)

Finally, the question is asking for the amount of sales S such that
P/S = 0.15 (B)

Substitute the expression for P in eqn. (A) for the numerator in eqn. (B) and solve for S.

Be sure to verify that your proposed solution for S does indeed generate a 15% return on sales, given the fixed costs and the 60% variable cost rate.

TheStudent
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Posted: 20 Jun 2012 at 12:16 \| IP Logged

Let’s work with this formula.

Sales = VC (Variable Costs) + NI (Net Income) + FC (Fixed Costs)

The problem gives us this info:

VC = 60% of Sales

NI = 15% Sales

FC = 20,000

So now we plug in the values into the formula and solve for x.

Sales = .60(Sales) + .15(Sales) + $20,000

We will go ahead and simplify the formula by adding the VC and NI so now it looks like this.

Sales = .75(Sales) + $20,000

We’ll further simplify the formula by subtracting 75% of sales from both sides. Since Sales on the left hand of the formula is at 100% and we subtract 75%, then we’re left with 25% of sales. The formula now looks like this.

.25Sales = $20,000

Here we can divide both sides by .25 so we get this

Sales = 20000/.25 = $80,000

As a final step, we can check this number by plugin this into the formula.

VC = 60% of Sales = .60(80,000) = $48,000

NI = 15% of Sales = .15(80,000) = $12,000

FC = $20,000

So does Sales of 80,000 = VC of $48,000 + NI of $12,000 + FC of $20,000? Yes it does!

So the answer is C. $80,000.

pras1
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Posted: 20 Jun 2012 at 19:30 \| IP Logged

Thanks a lot

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