Calculate the target sales value using the marginal income ratio, if a profit of R600 000 is desired.
Answers
Given :
Estimated units of production and sales = 3,000 units
Selling price per watch = Rs 900
Direct material per watch = Rs 270
Direct labor per watch = Rs 180
Variable manufacturing overhead cost per watch = Rs 90
Fixed manufacturing overhead cost Rs 282,000
Fixed marketing and admin cost Rs 150,000
Variable marketing and admin cost Rs 10%
To find :
Target sales value = ?
Solution :
For computing the target sales value first we have to find out the contribution margin ratio which is shown below:
= (Selling price per watch - direct material per watch - direct labor per watch - Variable manufacturing overhead cost per watch - Variable marketing and admin cost per watch) ÷ (Selling price per watch) × 100
= (Rs 900 - Rs 270 - Rs 180 - Rs 90 - Rs 900 × 10%) ÷ (Rs 900)
= 30%
The contribution margin per unit is
= Selling price per unit - variable cost per unit
Now to calculate the target sales value;
The formula is
= (Total Fixed cost + desired profit) ÷ (Contribution margin ratio)
= (Rs 432,000 + Rs 600,000) ÷ (30%)
= Rs 3,440,000
The total fixed cost is
= Rs 282,000 + Rs 150,000
= Rs 432,000
Hence, the target sales value is Rs 3,440,000
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