Question

Liu Sales has two store locations. Sanford has fixed costs of $285,000 per month and a contribution margin ratio of 30%. Orlando has fixed costs of $540,000 per month and a contribution margin ratio of 70%. At what sales volume would the two stores have equal profits or losses?

a. $637,500.
b. $825,000.
c. $1,717,500.
d. Cannot determine with the information given.

Answer 1

Answer:

a. $637,500.

Explanation:

we solve dconsidering the target profit formula shoul give the same value on both companies:

(285,000 +profit) / 0.3 = (540,000 + profit)/ 0.70

(285,000 + p ) x 7/3 = 540,000 + p

665,000 + 7/3p = 540,000 + p

p = (540,000 - 665,000)  / (4/3) = -93,750

Now we solve the target profit (in this case "loss") to know the sales volume.

(285,000 - 93,750) / 0.3 = 637,500

(540,000 - 93,750) / 0.7 = 637,500