Question

Gordon's Steel Parts produces parts for the automobile industry. The company has monthly fixed expenses of $640,000 and a contribution margin of 95% of revenues. Gordon feels like he's in a giant squeeze play: The automotive manufacturers are demanding lower prices, and the steel producers have increased raw material costs. Gordon's contribution margin has shrunk to 65% of revenues. Gordon's monthly operating income, prior to these pressures, was $319, 500. Read the requirements. Requirement 1. To maintain this same level of profit, what sales volume (in sales revenue) must Gordon now achieve? Begin by identifying the formula to compute the sales in units at various levels of operating income using the contribution margin approach. (Fixed expenses + Operating income)/Contribution margin ratio = Target sales in dollars (Round your answer up to the nearest whole dollar.) Gordon must now achieve sales of $ to maintain the same level of profit.

Answer 1

Answer:

Gordon Steels Parts will be required to sell $1,476,154 to maintain its profit level of $319,500

Explanation:

Fixed Expenses = $640,000

Contribution Margin = 95%

To compute Sales in Unit at various levels of Operating Income:

= (Fixed expenses + Operating income)/Contribution margin ratio = Target sales in dollars

= (640000 + 319500)/95%

= $1,010,000

As a result of Raw Materials Price increases, Margin has shrunk to 65%

This implies the new target sales to maintain same Operating Profit will be

= (640,000 + 319,500)/65%

=$1,476,154