Required:
Sales - VC - FC = 20% sales Sales 60,000
x - 0.4x - 24,0000 = 0.2 x Variable Cost 24,000
0.4x = 24,000 Contribution Margin 36,000
x = 60,000 Fixed Cost 24,000
Sales = 60,000 Operating Income 12,000
Sales - VC - FC = 20% sales Sales 60,000
10x - 40%(10x) - 24,000 = 20%(10x) Variable Cost 24,000
10x - 4x - 24,000 = 2x Contribution Margin 36,000
4x = 24,000 Fixed Cost 24,000
x = 6,000 Operating Income 12,000
Sales - VC - FC = 25% sales Sales 96,000
10x - 40%(10x) - 24,000 = 25%(10x) Variable Cost 38,400
10x - 4x - 24,000 = 2.5x Contribution Margin 57,600
3.5x = 24,000 Fixed Cost 24,000
x = 9,600 Operating Income 33,600
Profit after tax = 20% sales
Tax rate = 40%
Operating Income = PAT x 100
1 - tax
= 0.2 sales x 100
60
= 0.3 sales
Sales - VC - FC = 0.3 sales Sales 80,000
x - 0.4x - 24,000 = 0.3x Variable Cost 32,000
Tom Flannery has developed a new recipe for fried chicken and plans to open a take-out restaurant in
Oklahoma City. His father-in-law has agreed to invest $500,000 in the operation provided Tom can
convince him that profits will be at least 20 percent of sales revenues. Tom estimated that total fixed
expenses would be $24,000 per year and that variable expenses would be approximately 40 percent of
sales revenue.
1. How much sales revenue must be earned to produce profits equal to 20 percent of sales revenue?
Prepare a contribution income statement to verify your answer.
2. If Tom plans on selling 12-piece buckets of chicken for $10 each, how many buckets must he sell to
earn a profit equal to 20 percent of sales? Twenty-five percent of sales? Prepare a contribution
income statement to verify the second answer.
3. Suppose Tom’s father-in-law meant that the after-tax profit had to be 20 percent of sales revenue.
Under this assumption, how much sales revenue must be generated by Tom’s chicken business?
(Assume that the tax rate is 40 percent.)
