The sales manager of Bullzai Company has been told that she will be fired unless the companys profit this year is at least $90,000. With the help of a friend in the controllers office, the sales manager has decided to estimate what level of sales will be required to reach this $90,000 profit target.

Here are data for Bullzai Company:

• Breakeven sales revenue: $250,000
• Fixed costs: $150,000

What is the calculated sales revenue necessary for Bullzai to generate a net income of $90,000?

• $625,000

• $500,000

  Incorrect.

• $450,000

• $400,000

  Correct!

The correct answer is calculated as follows:

Sales revenue	$250,000
Variable cost	($?)
Contribution margin	$?
Fixed cost	(150,000)
Net income	$0

Contribution margin must equal $150,000.

Variable cost must equal $100,000.

Variable cost ratio must equal 40% ($100,000/$250,000).

Let R equal the sales revenue necessary for a target profit of $90,000.

R 0.40R $150,000 = $90,000

0.60R = $240,000

R = $400,000

HOW DID THEY COME UP WITH THE CONTRIBUTION MARGIN AND VARIABLE COST?