Rodney Rogers, a recent business school graduate, plans to open a wholesale dairy products firm. Rogers expects first-year sales to total $5.50 million. He desires to earn a target pretax profit of $1 million during his first year of operation. Variable costs are 40 percent of sales. a. How large can Rogers’s fixed costs be if he is to meet his profit target? b. What is Rogers’s breakeven level of sales at the level of fixed costs determined in Part a?

Results are below.

Explanation:

Giving the following information:

Rogers expects first-year sales of $5.50 million. He desires to earn a target pretax profit of $1 million during his first year of operation. Variable costs are 40 percent of sales.

First, we need to determine the variable costs:

Variable costs= 5,500,000*0.4= 2,200,000

Now, the fixed costs:

Fixed cost= 5,500,000 - 2,200,000 - 1,000,000= $2,300,000

To calculate the break-even point in dollars, we need to use the following formula:

Break-even point (dollars)= fixed costs/ contribution margin ratio

Break-even point in units= (2,300,000) / [(5,500,000 - 2,200,000)/5,500,000]

Break-even point (dollars)= 2,300,000 / 0.6

Break-even point (dollars)= $3,833,333.33